Culture Keeps Firms Together in Trying Times

IN the year before it collapsed, Dewey & LeBoeuf went on a recruiting binge. The law firm poached 37 partners from rivals with multimillion-dollar, multiyear guarantees. Existing partners typically learned about new colleagues via e-mail.

Cravath, Swaine & Moore does things a bit differently.

When Christine A. Varney, the Obama administration's former top antitrust lawyer, joined Cravath last summer, she was just the fourth outside partner in a half century. But first, she had to meet all 83 partners - and any retired partners who wanted to sit down with her.

“I joked with Christine that it was like we were buying a horse,” said C. Allen Parker, who will soon take over as Cravath's presiding partner. “Everyone had to check her gums.”

Cravath parked her in a conference room. Partners streamed in and out. Five came in, two left. Four more came in, three lingered. Across two days, she was interviewed by the entire partnership.

“The big question was not whether she was a good lawyer, but whether she was a Cravath partner,” said Evan Chesler, the firm's outgoing presiding partner. “Would she be a good fit?”

A few weeks later, the Cravath lawyers assembled and unanimously voted her into the partnership. She received no signing bonus, no guarantee, no special deal. Instead, Cravath is paying her according to the firm's seniority-based, lock-step system, which sets the spread between the highest- and lowest-paid partners firmly at 3 to 1.

“We're not going to buy a lawyer with a big guarantee,” Mr. Chesler said. “That's not how we do things. That's not the Cravath way.”

The Cravath way? Really? One might dismiss such high-minded rhetoric as idealistic poppycock from a white-shoe lawyer hanging on to antiquated notions about the practice of law.

But the Cravath way, and Mr. Chesler's impassioned views about law firm partnerships, may be worth paying attention to at a challen ging moment for corporate law firms. The implosion of Dewey earlier this year - the largest law-firm bankruptcy in history - exposed the dark side of prevailing trends in Big Law. Four years after the financial crisis, the business climate remains challenging.

“At a difficult time in the legal industry, and at a time when the failure of Dewey illustrates how much can go wrong in the existing competitive environment, it makes good sense to look at the truly elite law firms that have done things right,” said Michael Trotter, a lawyer in Atlanta who has written books about the profession.

Cravath, along with Debevoise & Plimpton and Cleary Gottlieb Steen & Hamilton, are three remaining law firms that adhere to a strict lock-step compensation system, paying their partners in a narrow range according to seniority.

There are no stars or empire builders at these firms. No one gets paid extra for bringing in clients, so there aren't disputes over who gets credi t for new business. There is complete transparency: All the partners know, to the penny, what every other partner makes. (A few other prestigious firms, including Davis Polk & Wardwell and Wachtell Lipton Rosen & Katz, pay partners in a tight band and maintain similar cultures.)

These firms are sticking to their old-school ways amid profound changes in the legal industry. Driving this transformation has been a change in the lawyer-client dynamic. Law firms once had entrenched, enduring relationships with clients. Citibank worked with Shearman & Sterling. Chase used Milbank Tweed. I.B.M. employed Cravath.

But today, client loyalty has deteriorated and relationships are up for grabs. In-house legal departments have grown in size and influence. Under pressure to contain soaring legal costs, corporations now spread the work around. Also, many companies look to hire specific lawyers rather than an entire firm, creating a free-agent market for top producers.

“I t's a variant of too big to fail,” said William Henderson, a law professor at Indiana University. “Everybody's worried that if you don't pay your rainmakers they'll leave, and then the firm will blow up.”

Many of the country's largest law firms, a group that includes DLA Piper (4,200 lawyers) and K&L Gates (1,800 lawyers), are trying to meet the demands of their increasingly global client base with rapid growth through mergers and international expansion.

These firms are luring partners away from competitors by offering rich salary guarantees. And they promote an eat-what-you-kill compensation structure that has created a widening gulf between the pay - and the morale - of a firm's stars and its so-called service partners.

At Dewey, the ratio between the highest- and lowest-paid partners ballooned to more than 25 to 1. In 2011, Dewey's merger-and-acquisitions star, Morton A. Pierce, secured an eight-year contract paying him $8 million a year. Junior p artners made $300,000 annually.

“When a law firm grows too fast, it almost by definition loses its culture,” said Cameron F. MacRae III, a former Dewey lawyer now at Duane Morris. “And a star system weakens the bonds of a law firm partnership and destroys the shared sense of purpose.”

A shared sense of purpose is something you hear repeatedly when discussing the cultures of Cravath, Cleary and Debevoise. Listen to Michael W. Blair, the presiding partner at Debevoise, and one could think he presides over a utopian socialist community. He throws around phrases like “one for all and all for one” and “we're the one-firm firm.” He highlights Debevoise's genteel culture - its teamwork, camaraderie and decency.

The lock-step system, he said, reinforces that culture. The idea is to attract and motivate partners with a shared set of values who want to dedicate their life to the firm, and not just look for the next big thing themselves.

“The o nly way a partner does better is if the firm does better,” Mr. Blair said. “Individual success doesn't mean very much here; we're all incented for collective success.”

At Cleary, Mark Leddy, the firm's managing partner, said that the firm did not attract - and had no tolerance for - lawyers with huge egos and sharp elbows.

“People who want to be a star and make $10 million a year don't fit in here,” said Mr. Leddy. “Some of these lawyers are extremely talented and they go on to make $10 million a year. But breaking the lock step system for them would be an unacceptable cost to our culture.”

Several stars have left Cravath, for instance, most prominently David Boies, a trial lawyer who started his own firm. On the corporate side, Robert A. Kindler departed after 20 years for a career in investment banking and is now a vice chairman of Morgan Stanley.

Mr. Chesler said that those were rare exceptions. “Planets occasionally spin out,” he said.

Departures do not appear to have affected Cravath's profitability. The firm ranks as the fifth most profitable in the country, according to The American Lawyer magazine, with profits per partner of $3.1 million. Cleary's profits per partner are $2.7 million and Debevoise's are $2.1 million, the magazine says.

The firms' strong performances and blue-chip clients are, of course, a major reason they can maintain the lock-step system.

“Any of these three firms would change their compensation system overnight if they became unsuccessful,” said Bevis Longstreth, a retired Debevoise partner. “Let's face it, one thing that holds people together is success.”

Maintaining a partnership culture presents particular challenges for Cleary and Debevoise. While Cravath has nearly all of its 430 lawyers in New York (other than a small London office), Cleary, with 1,200 lawyers, and Debevoise, with 650, have vast international operations. Cleary will open its 16th office, in Seoul, later this year.

“International expansion puts a strain on our culture,” said Mr. Leddy of Cleary. “We're constantly asking ourselves as we grow how to sustain the glue holding us together.”

Maintaining those bonds is one reason the firms are so circumspect about lateral hiring, preferring homegrown talent instead.

And it is rare for partners at Cravath, Debevoise or Cleary to leave for competitors. But in 2005, Ralph C. Ferrara of Debevoise turned heads by moving to another firm. Mr. Ferrara, a securities litigator who brought in big, lucrative cases, frequently complained about the lock-step system. He bristled that some partners earned as much as he did yet had no clients of their own. He also was frustrated that he couldn't expand his business by hiring partners from other firms.

Realizing he would not change the ways of such a hidebound institution, Mr. Ferrara left Debevoise after 23 years to join LeBoeuf Lamb . After Dewey and LeBoeuf merged, he became one of Dewey's highest-paid partners, earning about $6 million annually. Mr. Ferrara recently agreed to return about $3.4 million of his compensation to help pay Dewey's creditors.

“As things have turned out, leaving Debevoise ended up being an imprudent decision,” said Mr. Ferrara, who now works at Proskauer Rose. “In my heart, I never left Debevoise; it is a place that I still love to this day.”

It is rare to hear a lawyer speak of a law firm with such affection, let alone one that he left years ago. Job satisfaction at corporate law firms is notoriously low, what with the long hours, demanding clients and sometimes mind-numbing work.

While the unhappy ones might be buried in a law library somewhere, partners at the lock-step firms proclaim love for their jobs.

“It might sound corny, but I really think our culture makes this a more relaxed and collegial and fun place to work,” said Mr. Leddy of Cleary.

A new compensation survey by the legal consultant Major, Lindsey & Africa backs up Mr. Leddy's sentiment. Seventy-nine percent of respondents from pure lock-step firms say they are satisfied with their work, with 55 percent describing themselves as very satisfied. That is more than double the percentage at other law firms.

Count Ms. Varney, who has been at Cravath for a year, as among the satisfied. She has provided antitrust advice on several deals since arriving, including Microsoft's investment in Barnes & Noble and Grupo Modelo's combination with Anheuser-Busch.

“When you take individual financial incentives off the table and focus on clients and collaborate,” Ms. Varney said, “the practice of law can be a rewarding profession first and a successful business second.”