Note: This story has been updated following a response from the firm.
Baker McKenzie quietly moved toward a black box compensation system for its equity partnership in North America at the end of last summer, The American Lawyer has learned.
The leadership of the 4,719-lawyer firm made the change to its equity partner compensation model following the end of its 2018 fiscal year, which ran from July 1, 2017, to June 30 of last year, said multiple sources with knowledge of the firm’s decision.
The firm, however, maintained it still has an open compensation system in North America, in which every equity partner can see the compensation of others on demand.
“The firm no longer distributes the information and instead makes it available upon request,” it said in a statement. “This change was well-received by many partners and has promoted more collaboration among our partnership.”
Sources said equity partners can make a specific request with their local managing partner, but that the option would only be available in the short term. The firm had no immediate comment on the details of the process or whether it would eventually stop sharing partner compensation details altogether.
The global legal giant began rolling out its new approach in August 2018, alerting partners of the change via email with a subsequent conference call coming later that month to discuss the changes in its North America compensation model, sources said.
In closed or so-called black box systems, partners’ compensations are typically determined by managing partners or management committees, and their compensation is not shared with anyone else at the firm.
Baker McKenzie’s recent switch is a departure from the previous open and transparent model the firm has implemented for its equity partners for years, said sources familiar with the matter.
Several large law firms employ a black box model, such as Greenberg Traurig, Jones Day, Sidley Austin and Snell & Wilmer.
And like other compensation approaches, there are benefits and disadvantages to the black box system.
Closed compensation models can promote collaboration and prevent in-fighting about partner pay. They could also be a good mode for recruitment because they have more flexibility to give lateral partners premiums without upsetting the rest of the partnership, said Meredith Frank, a recruiter and managing director at Major, Lindsey & Africa.
However, with the lack of transparency in a closed system, there could be a fear that this will lead to unfairness in compensation decisions, she said.
“It is very challenging for firms to go from a totally open comp system to a closed comp system,” Frank added. “I think it’s probably easier to go in the opposite direction.”
But there are firms that have recently headed in that direction other than Baker McKenzie. Fried, Frank, Harris, Shriver & Jacobson overhauled its compensation system and adopted a partial black box model for partner compensation in recent years.
Frank said that she would be surprised if other law firms followed suit. Partners already in open models typically prefer open compensation systems while those often in closed systems prefer more transparency, Frank said.
According to Major Lindsey’s 2018 Partner Compensation Survey, partners in open compensation systems report higher average compensation, higher average origination and are more likely to classify themselves very satisfied with their compensation transparency than partners in partially open or closed systems.
And when it came to change, 69 percent of partners in closed compensation systems said they would like to see aspects of their compensation change. This is compared with 60 percent of total respondents who said they wanted to see some change.
“I don’t think we’re going to see this trend [of adopting closed systems] and if anything I think the statistics and the data that we’ve amassed in our compensation surveys would lead me to conclude that at some point some firms may move in the opposite direction,” she added.