The $10m question - how long can partner comp buck the global pay race?

Feeling light on inspiration, I'm indebted to The Wall Street Journal and Adam Smith, Esq for giving me something to get my teeth into with a prominent piece this week from The Journal. The article charts the dramatic increase in the size of pay packages being offered to star US partners and the related widening of the pay gap for partners, citing top-end packages in the $10m (£6.3m) region against $640,000 (£405,000) for the water-carriers.

Interesting nuggets in the article include the fact that Skadden Arps Slate Meagher & Flom last year widened the range between top and bottom-earners, while wide pay ranges are also highlighted at firms as disparate at Hogan Lovells, K&L Gates and DLA Piper. Packages for top partners cited include deals of $6m (£4m) at DLA Piper in the US and $8m (£5m) at Kirkland & Ellis. The Journal's claim is that the most sought-after rainmakers now often earn eight to 10 times that of the lowest-paid equity earners within the same firm.

Perhaps the most interesting questions are: why is this happening? What it means for the profession? And what does this mean for UK law firms? Bruce MacEwen tackles a lot of the why in Adam Smith, arguing convincingly that the trend reflects a winner-takes-all dynamic that has been seen in a wide variety of fields like entertainment, sports, media and executive pay. International expansion also obviously plays a huge part since operating costs and market rates will diverge widely across borders, a reality that strains the confines of lockstep-based models.

But given that this dynamic shows no sign of abating, a neutral observer might wonder how much longer leading UK law firms can buck this trend. Because there is little evidence of this global shift having anything more than a moderate impact on the UK legal market, where as a rule firms pay their plateau partners two or three times the amount that junior equity partners receive.

Now, there is one logical reason for this. The success of City firms in institutionalising client relationships has been a strong factor in containing pay inflation for star partners. The tactic has also been an enormous success, making it easier to repel predatory lateral hiring and, because it's far harder to move clients with partners, making law firms more stable. In comparison, even large and profitable law firms in the US can collapse once a critical mass of partners head for the door.

But, even allowing for this moderating factor, the extent to which a lid has been kept on the pay of the City's 800lb gorillas is strange. The UK is the most free-market economy in Western Europe and has seen greatly increased income inequality in most areas of industry since the 1980s. And, of course, City law firms have led the way in international expansion and in styling themselves as businesses - trends which on paper should have produced a similar dynamic to the partner comp shift seen in the US.

True, the majority of top 50 law firms have moved away from pure lockstep but that is misleading. Most of these modified or supposedly merit-driven systems bear a strong resemblance to lockstep and deploy relatively narrow ranges between the top and bottom - often in the 3:1 or at most 5:1 range.

It is also true that lockstep still has much to commend it. It is easy to see how Linklaters and Freshfields Bruckhaus Deringer have used the model to help retain a coherence and alignment to their practices as they have gone global. And lockstep also has the enormous virtue of imposing a strong link between firm performance and individual remuneration - a jarring contrast to what has happened in executive compensation, where CEOs have seen pay explode with little evidence that increased rewards have improved corporate performance.

But there's nothing inherent in the concept of lockstep that says you need to operate it on a 2.5:1 ratio. It's fair enough for Slaughter and May but grating for a truly global practice. The obvious solution would be an evolution towards a model where you have a 4:1 or 5:1 spread with two discretionary gateways and sloping provision to bring down compensation for older partners.

Even aside from the demands for flexibility due to international expansion, the current market outlook also strongly support moves to give bigger rewards to star performers. When growth is hard to come by, there is a greater premium on partners that bring in business (and take it with them).

It's been a healthy thing for City law firms that earnings of ‘shareholders' have remained closely tied to institutional performance. But you don't have to believe that City firms should start offering $10m packages to think that the status quo can't buck the market forever.

For more, see:

• Pay Gap Widens at Big Law Firms as Partners Chase Star Attorneys
• Winners Take All? Yes, No: Debate Among Yourselves