At Wachtell Lipton, compensation operates under a pure lockstep system, seniority, not production

Marty Lipton built one of the most profitable legal models in the world and accepted earning less than the market would have paid him. It was a matter of strategy more than generosity.

At Wachtell Lipton, compensation operates under a pure lockstep system, seniority-based rather than production-based. No origination credit for bringing in clients. No bonuses linked to billable hours. No premium attached to client relationships. The partner who originated the mandate is compensated exactly the same as the partner who executed it, provided they have spent the same number of years at the firm.

For any managing partner accustomed to compensation debates that consume weeks of meetings, this appears almost unreal.

Yet there is something even more revealing than the system itself. Neff, the co-managing partner, describes the consequence of Lipton accepting compensation below his market value in the following terms: when a founder accepts earning less than he could in order to maximise the chances of building an enduring institution, it sends an unequivocal signal about the type of firm being built. A signal that every partner reads with precision.

What lockstep solves that other systems do not

In my view, this is the critical distinction that very few firms have the courage to confront. Most compensation systems are designed to retain top-performing individuals. Wachtell’s lockstep system is designed to build an institution.

Those are different objectives, and at times directly contradictory. When compensation depends on individual production, each partner optimises his or her own book of business. Clients belong to individuals, not to the firm. And when that partner leaves, the client usually leaves with them.

At Wachtell, clients belong to the firm, not to individual partners. The compensation system makes that structurally true, rather than merely aspirationally stated. The result: throughout the firm’s entire history, not a single partner has left Wachtell for a more attractive financial offer. Not one.

The question no managing partner asks out loud

There is a conversation that recurs in almost every law firm and consumes a disproportionate amount of political capital: whether the compensation system is fair. That debate reveals something deeper than any conclusion ultimately reached.

When partners spend weeks debating how to allocate points, they are implicitly acknowledging that the system rewards individual contributions. Which means each partner operates according to the logic of maximising his or her own position within the system, rather than the firm’s position in the market.

Wachtell eliminated that debate. Partners do not compete with one another for credit. They compete collectively against the market.

That difference in orientation helps explain why, in 2018, Wachtell advised on 75 transactions with an aggregate value of US$421 billion, while Kirkland & Ellis, with nine times as many lawyers, advised on 418 transactions worth US$304 billion. Greater volume, lower value per transaction.

What this means for your firm

I am not arguing that the lockstep system is replicable across most firms. It is not.

What is replicable, however, is the underlying question: is your firm’s compensation system aligned with the type of institution you want to build, or is it aligned with the interests of the partners who currently hold the greatest power?

In practice, most compensation systems are the result of historical negotiations between partners with unequal bargaining power, rather than the outcome of a strategic decision about what kind of firm they want to become in ten years’ time.

More than the profit margins themselves, that is what makes the Wachtell model difficult to replicate. And, in my view, most managing partners know this perfectly well but prefer not to articulate it openly. Wachtell made that decision in 1965, and has never revisited it.

If you recognise this pattern within your firm, let’s talk.

Marc Gericó
Global Managing Partner of Gericó Associates