Wachtell, Lipton, Rosen & Katz
STATISTICAL STUDIES OF LAW FIRMS
Gilson and Mnookin (1985) reported that lawyers in larger law firms receive higher compensation than
those in smaller firms, that more Stanford graduates had been taking jobs in large law firms, and that the
largest law firms are growing larger. They then argued that law firms have been growing larger in order to
diversify and that diversification helps to explain law firms’ commitment to "lockstep compensation."
Lockstep compensation makes seniority the sole determinant of lawyers’ wages and of partners’ profits.
Gilson and Mnookin (1985, pp. 328-9) explained: "The lawyer cannot diversify his human capital
investment. He cannot be both a securities law specialist and a bankruptcy law specialist." Because
domains of specialization become more or less lucrative as demands for their services fluctuate, lawyers
find it useful to create "full-service" firms and to agree "that the returns to [human capital investments in
different specialties] will be shared on a predetermined basis rather than in accordance with actual
outcomes."
In a later article, Gilson and Mnookin (1989, p. 585) reported:
First, firm leverage [the ratio of non-partner associate lawyers to partners] is directly
related to firm profit: the higher the firm’s leverage, the higher the firm’s per partner
profit. When one outlier is eliminated, our regression analysis of data from the American
Lawyer’s compilation of the one hundred most successful corporate law firms for 1987
discloses that differences in leverage explain 34.3% of the differences among firms in per
partner profitability. Second, the degree of firm leverage appears to be determined, in
part, geographically: the same data indicate that among these one hundred firms, those
based in New York City had an average associate/partner ratio of 2.55, while those based
outside New York had an average ratio of only 1.66; the leverage of New York firms was
greater by some 54 percent. . . .
The outlier is Wachtel [sic], Lipton, Rosen, & Katz, a firm specializing in hostile [sic]
takeover work. In 1987, Wachtel was reported to have an average profit per partner of
$1,405,000  the top in the nation  although its ratio of associates per partner was
only 1.05. This firm bills for takeover work on a transaction, rather than a per-hour, basis,
which significantly reduces the importance of leverage. If Wachtel, Lipton is included in
the regression, differences in leverage explain 20.9% of the differences among firms in
per-partner profits.
Samuelson and Jaffe (1990, p. 190) remarked:
The major source of profitability for firms has traditionally been an army of associates
who receive a salary equal to only a fraction of the revenues they generate, with the lion’s
share divided among the partners. Associates have been willing to cooperate with this
system because they have had a good chance of being promoted to partnership. Thus,
they anticipated that, in the relatively short period of six to twelve years, they would be
sharing in the economic surplus generated by associates. Since partners have grown to
expect an income based on a ratio of at least one (and ideally more) associates to each
partner, firms suffer under an enormous growth imperative. Each time an associate is
promoted to partnership, two or three new associates must be hired.
Price Waterhouse has been sending questionnaires to the managing partners of "well managed" law firms
since 1961. Roughly 600 firms participate in the Statistical Survey and 300 in the Compensation Survey.
Price Waterhouse allowed Samuelson and Jaffe to analyze the responses submitted by 219 firms that
responded to both questionnaires in both 1985 and 1986. These firms employed from eight to 645 lawyers,
the average being 115.
Samuelson and Jaffe tried to estimate the effects of various variables on profits per partner. Table I lists the
statistically significant variables.
Table I. Determinants of Profit per Partner (Samuelson and Jaffe, 1990)
Variable
Incremental
Correlation
Number of associates
.25
Number of partners (negative effect)
.13
Hours billed per associate
.10
Non-legal staff
.06
Computer workstations
.02
Hours billed per partner
.01
Being in New York City
.01
Lockstep compensation
.01
Samuelson and Jaffe struggled with these findings because they had expected profitability to correlate with
total lawyers and with leverage. They concluded (a) that total lawyers adds no "explanatory value" beyond
the number of associates and (b) that leverage adds no "explanatory value" beyond the combination of
associates and partners. One should, however, view their analysis and interpretations cautiously because
statistical methods tend to produce errors when the explanatory variables correlate with each other: A
combination of associates and partners might afford a fair approximation of leverage, and associates plus
partners equals total lawyers.
High-Revenue, High-Profit Law Firms
Figures 1 to 8 graph some statistics about 20 of America’s largest 100 law firms. The firms shown are the
ones that ranked at the top on either revenue per lawyer or profit per partner during 1989 or 1990. The
graphs represent four-year averages for estimates made by the American Lawyer. Some of these estimates
are more accurate than others because the American Lawyer is able to get more information or more
reliable information about some firms than others.
HOW WACHTELL WORKS
Except for those taken from books, the quotations that follow are anonymous. Before each quotation is a
letter that denotes its source, as shown in Table II. The interviewed clients are all General Counsels of
major corporations. The opposing lawyers include several of New York's most successful ones. The
statements by associate lawyers come from questionnaires they submitted to the American Lawyer in 1990
or 1992.
Table II. Codes Identifying the Sources of Quotations
A
An associate in Wachtell
C
A lawyer who has been a client of Wachtell
L
A document that Martin Lipton wrote in 1987 and
then revised for the firm’s 25th anniversary in
1990
O
A lawyer from a competing firm who has opposed
or collaborated with Wachtell
P
A partner in Wachtell, including both junior and
senior ones
S
A member of Wachtell’s non-lawyer support staff
The Beginning
Wachtell was founded by men seeking P: "interesting work rather than lucrative."
In 1965, four friends and alumni of New York University’s Law School decided to form their own law
firm. P: "We wanted an old-fashioned partnership rather than a business. . . . We didn’t want a hierarchy,
didn’t want a managed business. Our goal was a congenial home for people who can’t function in a
hierarchy. One early decision was better legal products at the cost of administrative waste." This "congenial
home" would have strong egalitarian norms: Every lawyer would write his own first drafts of briefs, and
every lawyer would do his own library research.
These values partly derived from personal experience. P: "We tried to avoid the bad things. We didn’t like
imperious senior partners using people instead of developing a firm. We wanted to have a different
relationship with our [junior] colleagues than we’d had with the people we had worked for." They had also
seen friends and former classmates working long hours for low wages while highly paid partners spent their
evenings at home. P: "In a lot of ways we didn’t know what we were doing. We didn’t think these things
through in a logical way. We just said we don’t want the unpleasantness we had and we’ve observed in
other places."
They vowed to refuse routine assignments even if this meant earning less money. Wachtell would not offer
a full range of legal services. It would try to excel in corporate law, creditors’ rights, and litigation. (Katz
also did real estate.) To ensure that legal expertise would count for more than social skills, every lawyer
with the same seniority would receive the same pay. There would be no special incentives to encourage the
courting of clients.
O: "They thought they could form a terrific law firm and make a lot of money. Marty Lipton is a great
securities lawyer and Herb Wachtell is a brilliant litigator, so they were taking no chances. It was the next
generation that took the chances  Nussbaum, Fogelson, Katcher. . . ."
A Transactional Practice
During Wachtell’s first year and a half of operation, in 1965 and 1966, one corporate client accounted for
two-thirds of its revenue. Then during the firm’s second year, contending groups within this key client
asked Wachtell to favor them in ways that made the partners very uncomfortable. The partners resigned the
relationship . . . and so lost two-thirds of their income. P: "We had to call a future employee and say ‘We
may not be in business next year.’"
The partners’ immediate reaction was to "go out and scramble" for work. However, after they had dealt
with the immediate crisis, the partners adopted policies that would keep a single client from becoming so
important again: P: Initially, they agreed that Wachtell would "emphasize transactional representation
rather than across-the-board general representation." They would base relations with clients on short-term
agreements about specific matters. L: "The Firm encourages its clients to maintain relationships with other
law firms." Around 1976, after some experience, the partners adopted a more sweeping limitation: L: "Firm
does not have retainer relationships with the retainer fee applicable to any services the client desires."
Partners in Wachtell see its transactional relations with clients as an asset. Transactional practice means
that it has few conflicts of interest arising from ties to long-standing clients, so it is likely to be available to
new clients. Transactional practice also implies that other law firms can enlist Wachtell as co-counsel
without fearing that it might try to steal their clients, and that clients need not fear that Wachtell will "play
politics" and disturb their relations with other law firms.
C: "They are basically a litigation firm and a firm that specializes in deal making and transactions. . . .
Where would we use them? Examples would be if we were going to make a major acquisition, or when we
adopted a shareholder-rights plan (sometimes called a poison pill), or when we have shareholder suits
against us."
O: "As an opponent and one who has been in the same area [of the legal practice], I’d rather have them
against me  no, not really against me, with me as co-counsel  than any other firm because they’re very
bright and creative."
O: "I’d be afraid they’d steal the client."
Case Selection and Innovation
Wachtell has adhered to its founders’ ideal of refusing to perform routine legal chores. It does not regularly
produce "green goods" such as stock registration statements and loan agreements, and it focuses on "a
limited number of interesting and difficult specialities" (L). P: "We are selective about cases. The partners
would be bored with routine, repetitive work such as prospectuses, underwriting, due-diligence." P:
"Wachtell is always ‘special counsel’. It deals with unusual problems and boardroom situations, such as
suits against directors. The client’s CEO is involved. Such cases have high visibility." P: "We try to make
the cases not-labor-intensive. We can’t handle cases that require a lot of labor."
Even in a slump, clients offer Wachtell twice as many cases as it can handle. In a boom, it turns down
seven cases for each it takes. P: "The firm could be 500 lawyers today if it took all of the work available."
P: "We could be an 800-lawyer firm today. We chose not to do that, to keep ourselves small." P: "We are
insulated against downturns by our small size. We’ve have always had more work offered to us than we
wanted."
P: "We never went 100% M&A [mergers and acquisitions]. We didn’t want to do only that. The work is
too intense, and the work might go away, so we always maintained a lot of other work." P: "The takeover
and buyout businesses have declined, but bankruptcies and litigation have ballooned." O: "I have to believe
that in the 90s, the corporate lawyers there [at Wachtell] are doing green-goods work."
P: "Transactional business requires a special kind of excellence  flexibility, creativity, and innovation."
L: "The Firm encourages innovations and has been successful in developing many, such as cross-border
equity mergers, mortgage-pass-through securities, the poison pill, the state business combination takeover
laws, and innovative forms for merger and acquisition transactions." P: "Herb [Wachtell] has ideas that
people think are crazy but they win cases." P: "Marty [Lipton] not only has good ideas every day, but every
five years, he produces a radical innovation. He wrote the law review article about the business-judgment
rule that became the basis for our M&A practice." P: "No one anywhere rivals him [Lipton], but a number
of the younger partners have come up with innovations."
One of Wachtell’s most important innovations was the idea that, instead of being paid by the hour, lawyers’
compensation should reflect their clients’ benefits. P: Wachtell sometimes "bases its fee in part on the
amount involved in the transaction and Firm’s contribution to the accomplishment of the client’s
objective." Thus, in 1988, Wachtell received $20,000,000 for two weeks of work defending Kraft against a
takeover attempt, P: "and obtaining billions more for the shareholders than originally offered." O: "How
they got compensated in the 80s is history. It’s no longer true today. It was . . . almost an anomaly."
O: "Lawyers should not be partners with their clients. That type of compensation can raise questions about
the lawyers’ objectivity." O: "The two or three cases in which the courts criticized the defense all involved
Lipton. In effect the courts said ‘You overstepped the bounds.’ Is it a case in which your fee arrangement
makes you more aggressive?"
M&A
Powell (1986, p. 40) noted, "Skadden Arps [Slate, Meagher & Flom] . . . was involved in 60% of all major
mergers and acquisitions during 1985 and Wachtell Lipton in 45% (Corporate Control Alert February
1986)."
A competitor who knows the firm well said:
What factors have led Wachtell to be so profitable? The first is that Wachtell was and is a
major factor in takeover work. Virtually all of the most successful firms have been major
presences in takeover work.
A second factor is that Wachtell has limited lines of business. That is to me a function of
its age. . . . Old law firms are like snowballs rolling down the hill. Not only can’t you get
rid of the bad business, it keeps growing. The theory that diversification is risk-averse is
wrong. It’s wrong because an unprofitable line is never going to become profitable again.
The third factor  Wachtell has the best work ethic of any firm in the country. A higher
percentage of Wachtell’s personnel have a diligent work ethic than any other law firm in
the country. This too is a function of the age of the firm. Wachtell has relatively few
people who are over 48-50, and the people at Wachtell who are over that age are a very
diligent group. They deserve credit, a lot of credit, for maintaining that work ethic. I’d
guess that 90% of Wachtell’s lawyers share their work ethic. At a firm like this one, there
might be [one seventh of the] lawyers who have that work ethic.
It takes all three factors. If they just had the other factors but not the takeover work,
they’d have been very successful but not as successful as they have been. If they just had
takeover but not the other factors, they’d have been very successful but not as successful
as they have been.
P: "We would have been intellectually successful, but perhaps not as financially successful, without
M&A." P: "M&A has evolved rapidly. Many firms have come in and dropped out. Wachtell has stayed
with it every step of the way." L: "The Firm’s success in takeover field is not attributable to other firms not
being willing to handle takeovers  those other firms were practicing in the takeover area before the Firm
 they were not successful and lost the practice because they were not structured to operate on a task force
basis and were unwilling to test corporate innovations  like the poison pill  in litigation." P:
"Takeovers are good examples of crisis-team situations. These provide good training grounds because you
see a whole case from beginning to end in two months. You see two or three complete cases the first year."
O: "It’s perfectly clear to me that Marty and Joe [Flom of Skadden Arps] saw this whole area of hostile
transactions developing long before other people recognized it. They saw it coming and got into it and just
out-marketed the hell other law firms. Also, what they did do was bring together the various disciplines. . . .
This task-force idea was very effective in selling to clients." P: "Wachtell focuses on takeover defense,
Skadden on offense." C: "One thing I did notice. During the 80s, the firm prided itself in only representing
the targets of takeovers. And then a couple of years ago, they began to represent the other side."
In 1982, Martin Lipton invented the "poison pill" defense against hostile corporate takeovers. According to
Powell (1986, pp. 21-2):
Prior to the Chancery Court’s decision upholding the poison pill [in 1985] ten companies
had accepted the advice of Lipton and adopted his innovation, and in the eleven months
between that ruling and the affirmation of the Delaware Supreme Court only an
additional seventeen companies followed suit (Corporate Control Alert April 1986). This
was a period of very cautious adoption by a few Wachtell Lipton clients who viewed
themselves as highly vulnerable to a hostile takeover attempt. Law firms other than
Wachtell Lipton did not recommend the pill to their clients because its future was still
uncertain; it was a radical innovation, not just some minor tinkering with corporate
charters. The slow diffusion of the poison pill was not due to inadequate information
about the new device, however. News of Lipton’s innovation spread rapidly through the
legal and business presses and Lipton himself promoted the poison pill in client
memoranda, interviews and addresses to lawyers. . . .
Once, however, the Delaware Supreme Court had put its seal of approval on the poison
pill, its diffusion occurred very rapidly. Indeed, within nine months of the court’s
decision a total of 263 companies had poison pills in place, including many of America’s
largest corporations.
O: "Gotta hand it to Marty though. That poison pill was a great thing. [Long pause.] His pill though didn’t
work! The court ruled against him in the Crown Zellerbach case. We added a feature to the pill that made it
work."
One competitor opined that the poison pill changed the nature of acquisitions, by devaluing the
nonmonetary components of deals and escalating the monetary values. O: "Marty’s creation, the poison
pill, the courts held that it was legal because he clothed it in a garb in which the courts looked only at the
formality of it and not at the substance of it. . . . The way the poison pill turned out was that only cash
counted. Any other kind of offer could be turned down. Negotiation disappeared. Junk bonds made it
possible to raise the [large amounts of] money."
In 1993, Wachtell was emphasizing, more than before, its capabilities in taxation, antitrust, and real estate;
and it was promoting its expertise in bank mergers and in recapitalizations of and regulatory compliance by
financial institutions.
Selective Hiring
P: "Wachtell’s strategy is rooted in personnel: Don’t compromise standards. Each generation should be a
good as the founders." P: "There is an external perception of a quality difference at Wachtell. Maintaining
that perception depends on recruiting. There is only a small pool of qualified applicants." O: "We recently
did a [very big] deal with Wachtell. They had a young tax lawyer who ran rings around my whole crew.
Just beat them into the ground. He wasn’t even a partner. They’ve got some wonderful people there."
During Wachtell’s early years, its hiring benefited from its founders’ disadvantages: It looked attractive to
Jews, and it had an inside track at the New York University (NYU) law school. Although discrimination
had been declining since the 1940s, the large American corporations and the banks and law firms that
served them had long traditions of anti-Semitism. NYU had a tradition of serving the children of recent
immigrants to America; and during the decades when elite law schools were applying quotas to Jewish
applicants, NYU’s doors had been open equally to all. During the 1960s and 1970s, NYU’s law school had
very high standards and was graduating some excellent lawyers; but because the school was much less well
known than the elite ones, its graduates had restricted job opportunities. The founders of Wachtell taught at
NYU’s law school and participated in alumni activities, and the deans of NYU’s law school advised
outstanding graduates to consider Wachtell. P: "For years, two-thirds to three-fourths of the [Wachtell]
lawyers were NYU" graduates. C: "They were able to people this firm with some lawyers who might not
have been acceptable at other firms  some Jews, some Irish, some Greek, some Italians, Polish  who
might have been welcome as associates at other firms but would never have made partner."
These demographic advantages gained strength from Wachtell’s small size and its policies of egalitarian
pay, egalitarian work, and every-associate-can-become-a-partner. P: "I wanted a small collegially
structured firm that works on the most sophisticated matters." P: "I joined Wachtell because I wanted a
small firm with intelligent people, highly regarded people." P: "I was attracted by Wachtell’s small size. I
was also, attracted by the promise that associates can make partner if they’re good enough. Other firms
don’t do this; they reject some deserving people." P: "The odds of becoming partner are far higher here.
This helps to attract top-notch people. We never hire people just to ease the burden of work. We’ve wanted
the firm to grow slowly; wanted to retain collegiality." L: "Partnership decision is made early, with
associates becoming partners at the end of six years. The basic premise is that every associate will become
a partner."
Today, the conditions that existed when Wachtell began have all but disappeared. Discrimination against
Jews has become largely insignificant in the New York law firms; NYU’s law school has become highly
respected; and Wachtell itself has become an icon. P: "Wachtell is the hardest firm in the US to get a job
in." P: "We have insanely tight criteria on whom we let in." P: "Most firms have many associates and few
partners. The partners make money on the associates’ excess value. These firms need 50-100 new
associates each year. They can’t hire 50-75 superstars in one year, so they hire a lot of not-so-terrific
lawyers and weed out. We only take in superstars at Wachtell. No fixed number. We take as many or as
few as look promising."
Nearly all of Wachtell’s hiring is out of summer jobs. Each year, around 1200 law students apply to
Wachtell for jobs as interns, and the firm chooses 20 to 25. At summer’s end, it offers long-term
employment to 12 to 15 of the interns who are beginning the last year of law school. Six or seven accept
the offers.
Associate lawyers receive appraisals after three, four, and five years. The senior partners make these
appraisals quite frank so that the final partnership decision surprises no one. The partnership decision
occurs earlier than at other leading firms.
Of those who start at Wachtell, over 40 percent become partners. Figure 9 shows the percentages.
Wachtell’s percentage is three times the average and 60 percent higher than the next highest one. The data
for the other firms come from the New York Law Journal (May 29, 1990; June 11-12, 1992). The data
describe 27 of the 30 largest New York firms and lawyers who graduated from law school from 1979
through 1983.
P: "In Wachtell’s history, only one person has been brought in as a partner." P: "When I joined the firm as
an associate in February it was with the expectation that by year end I would be made a partner, if
everything worked out. That is a euphemism for ‘if everyone likes you and respects you’" (Lederman,
1992, p. 59).
High Quality
C: "I’ve had nothing but the best experiences with them and I’ve always had the impression that there’s
something they do that is unique." P: "The advantages of working at Wachtell are always dealing with very
smart people, also highly motivated people who look further for evidence. Imaginative ideas. Good
theories. It’s a spectacular environment. Our clients are always amazed and happy with the people who
work on their cases. Also, clients get partners, not associates, working on their matters." P: "People are
wildly self-motivated. Their drive to do a spectacular job is so great that they’ll drive themselves nuts. The
success of the firm came from lousy marriages." P: "Wachtell is also somewhat arrogant. We believe we
are as good as any firm in the US." P: "It is a true academic environment in the best sense of that term.
There are never any political issues. The only thing to think about is what is the best way to do it. Never,
never compromise anything." O: "I think that what has distinguished the Wachtell firm is that they have
consistently gone out and hired first-class minds." O: "If they say ‘We are the best there is’ and they try to
behave that way, that is what makes it real."
L: "The Firm has not deviated from the basic premise on which it was founded twenty-five years ago  if
you do a superior job there will be more demand for your services than you can meet." P: "People come to
us because they perceive us as very good lawyers." P: "Wachtell’s attraction to clients is basic things.
People really care. They’ll work 20 hours more to improve a document 2%." P: "Wachtell has quality
consistency far higher than any other law firm." O: "They can be a little slovenly." P: "I always knew that I
could work as many hours as I wanted to do the best job I could and nobody would ever second guess me."
P: "I’m successful because I’m scared. All you have to do is screw up once or twice."
O: "When I was sued, they were my first choice" to represent me.
O: "I’ve been involved in many situations where we’ve bested them. Like the . . . case. It was just
marvelous." So how does one go about beating Wachtell? "There’s no consistent theme to it. They don’t
have any glaring weakness. Marty, of course, became more doctrinaire as he matured in the practice."
C: "Are they better than other lawyers? I find it easier to talk about individuals. We use other firms as well.
I’m enormously impressed by the associates at Cravath; I think they’re the best associates I’ve ever met. At
Wachtell, there’s an enormous consistency at an exceptionally high level  mainly among the partners."
O: "There are differences in degree in what they do, and there are differences in how hard their partners
work. There is not a significant difference in the kind of work or quality of work. They have been able to
do it on a more profitable basis and to have less chicken shit in what they do."
Commitment, Stress, and Self-Confidence
Why do only half of those to whom Wachtell offers jobs accept? Who would not welcome an opportunity
to work in such an organization? After all, it is a very prestigious firm that offers high pay and high
probabilities of partnership, that provides an egalitarian, collegial work environment, and that practices on
the leading edge of the law. Obviously, some lawyers do see a downside to working at Wachtell, but
without interviews with those who turned down offers, one can only speculate about their reasons. One
factor may be the lawyer’s commitment to career achievement and hard work. A second factor may be the
lawyer’s attitude toward stress. A third factor may be the lawyer’s self-confidence.
Wachtell resembles an emergency medical team. Their clients are desperate and demanding. Although
willing to pay very high prices, the clients want immediate results, and they expect Wachtell to deliver
products that their normal law firms cannot  legal innovations, remarkable arguments, extreme quality.
L: "The Firm’s operations are geared to the needs of its practice  24-hour-7-day full service; always
prepared to do a deal, fight an injunction or give an opinion on an overnight basis." P: "Wachtell treats
everything as a crisis. Clients get upset if lawyers slow things down." P: "My wife says this firm is built on
failed marriages." P: "Our creed is being there when the client wants you, getting it done expeditiously,
turning out the best possible piece of work, and being scared. You’re worrying so that [the client] doesn’t
have to worry." C: "You give them something, they’re interested in it. I call up at 3:30 in the afternoon,
they’ll be in my office at 5:30, maybe 8:30 the next morning. If I ask for Marty, he’ll call me back in half
an hour. He might be in Europe or on the West Coast, but he calls me back. Since most of our work is
litigation, we don’t use him that much, but still, I like that relationship."
P: "Wachtell people take a lot of pride in what they do." P: "Wachtell people work harder than others. They
agonize over important calls and major matters." S: "We just know that it’s last minute." O: "I suspect that
they work harder" than other lawyers." O: "Another thing I’ve always been impressed by over there is their
dedication to hard work."
To call these extremely self-confident people would be gross understatement. To attract Wachtell’s
attention initially, they had to have outstanding records in law school. They knew they were brighter than
almost everyone. They knew they could accomplish more than almost everyone. Those who joined
Wachtell before it became well known were putting their own judgments ahead of general opinion. P:
"Most law students saw Wachtell as a gamble [when I graduated]. Wachtell wasn’t well known among
most students at [my law school]." Even those who join Wachtell today are choosing an unconventional
path.
Then Wachtell offered them positions as junior associates who would have unusual responsibility. To take
these positions, they had to regard themselves as ready to practice law on an equal basis with the best. They
would be working among people who are at least as able as themselves.
Recall that the founders wanted a firm in which associates do not do grunt work for partners and partners
work as hard as associates. As the firm developed, the founders augmented their initial ideas with three
more notions: (a) that new graduates from law school would have major responsibilities, (b) that no lawyer
would be hired or retained unless they expected him to become a partner, and (c) that major cases would be
shared by teams of lawyers representing different specialties.
P: "You’re about as good a lawyer as you are ever going to be after your first year in law school." L:
"Associates get full responsibility as soon as they are ready." A: "I feel I have been granted a surprising
degree of responsibility." A: "By third year, an associate often will be the primary contact on a number of
matters and negotiating major portions of transactions. I find I am given more responsibility than associates
I come across at other firms  no matter what class year they are in." A: "It is hard for me to imagine any
firm where I would get more responsibility and consistently excellent work." A: "‘Partner’ functions and
roles are often not clearly distinguishable from ‘associate’ functions and roles." O: "They can delegate
responsibility to people who aren’t ready for it."
P: "There is prompt feedback when you screw up." P: "Employees have to expect to be treated as
autonomous professionals or they wouldn’t join Wachtell." P: "You never feel afraid of telling Wachtell or
Lipton ‘I just don’t understand this. Explain it to me.’" C: "The [Wachtell] partners have a presence. They
have a certain style. It’s a commanding style. They’re not background people. They tend to be forceful
advocates of what they think is the right legal judgment."
P: "The main disadvantage of working at Wachtell is not enough associates to handle matters. The partners
feel overworked and complain. The partners would like more help." P: "Everyone drafts briefs; everyone
does research; everyone deals with clients. In other firms, the senior partner goes home at 5 p.m. and leaves
the work for inexperienced associates. At Wachtell, no one does that." P: "No one works harder than Marty
Lipton."
Egalitarian Compensation
Wachtell’s compensation system reinforces its egalitarian norms.
One of the firm’s most unusual policies is that it takes no markup on associates’ time; clients pay
proportionately less for the work done by associates. P: "Wachtell has no leverage. Instead, we get topdollar for what we do."
Thus, the firm has no incentive to employ associates instead of partners. Indeed, the financial incentives
promote the opposite. P: "Partners do a lot of low-level work" but charge clients proportionately more for
it. P: Wachtell is a "bottom-loaded partnership because there are so many younger ones." P: This strategy is
"protected by the excess demand for our services."
C: "We use them because they are very good. They work very hard. We can call them on a Friday
afternoon and they’ll work through the weekend. They’re expensive, but they’re not that expensive because
they don’t use so many people. They never overstaff there. Where another firm might use six or eight
people, Wachtell might use two or three. The aggregate bill may be not that much higher. Why do you pay
a little more? Well, the quality of the work, the timeliness."
Despite the firm’s high profit per partner, Wachtell’s senior partners say profit per partner is not a good
measure of their firm’s performance because profit per partner places too much emphasis on partners and
too little on associates.
Partners too have egalitarian compensation in comparison with many firms. P: According to Wachtell’s
lockstep formula: "The three founders get 125% of the average. Other seniors get 100%. Younger partners
progress toward 100%. A new partner would get around 33%." P: These percentages are "determined
entirely by seniority. No one is compensated for client clout." L: "Hours worked, client contact, firm
administration all do not affect partnership shares."
P: This compensation system "can only work where everyone is sharing the workload. No one is seriously
considering changing the system. It requires trust among partners, sharing, beneficence by the seniors." P:
"No one came to this firm for dollars; no one stays for dollars." P: "We can move associates around
because no partner is responsible for a specific client. Also, there is no reticence to bring someone else into
a client relationship. Lockstep is very important."
P: "Lockstep fosters co-operation. But the question is: can we afford it in terms of decreased
entrepreneurship? Lipton gave up income to buy loyalty, but he also gained more control, more decision
power." Partners conjectured that Lipton would be making 3-6 times as much if he were in another firm. O:
"Lawyers tend to be risk-averse  even a great lawyer like Marty Lipton. If he went to another firm, would
he have a senior litigator as good as Bernie Nussbaum?"
Collegiality and Culture
P: "Wachtell is a special place. It has a culture. It is structured differently. No one is hired who is expected
to leave. People treat each other well. There is no pyramid of partners and associates. There is no
competition among the associates." P: "Excellence as a lawyer is cherished. A lot of people teach [in law
schools]. Education is valued. Comradeship is also valued. The one-to-one ratio lets partners spend time on
associates, help them develop. There is much loyalty to the firm. The associates rated Wachtell first in New
York City." A: "I am . . . impressed with how informal and nonhierarchical relationships between partners
and associates are." P: "One of my surprises on becoming a partner was the very collegial atmosphere
among the partners." P: "I came to Wachtell because it looked different  smaller, less widely known at
[my law school]. The Wachtell people seemed very smart, bound together some way but not socially 
young aggressive people. I didn’t understand the structural difference between Wachtell and other firms."
P: "Wachtell doesn’t abuse human capital." S: "We all feel part of a very big family. . . . Every person feels
that the firm cares about them. If you need money, if you need medical advice, even if you’re abroad,
there’s always someone here. . . . People have been here 15 to 20 years. They don’t leave. They feel it’s just
family. . . . People come here to be spoiled. . . . If someone decides they want a different soda, or a different
flavor cookie, it’s here. It’s a firm that does everything for everybody. It’s because we care."
P: "People like each other, and in large part, it’s because the things that cause dislikes are eliminated." P:
"Doors are open. Everyone has a first name, and people use them." A former partner, Lederman (1992, p.
57), recalled: "All office doors were always open, fostering a communal workplace. Everyone treated the
office like home, and no one felt any need to knock on doors or to hesitate to cross a threshold. Lawyers
would walk into your office, demand attention (almost always bringing cookies or coffee or soda from the
small kitchen), and begin talking about what was bothering them, while offering you food, even though you
were with someone else or on the phone. . . . Without any privacy, everybody knew what everyone else was
doing, which meant that knowledge was shared, making the informality more effective than seminars or
luncheons arranged for the dissemination of information. George Katz, one of the founding partners,
embodied this family style. He visited all the offices almost every day, bringing encouragement or news or
gossip, a practice which he continued until his premature death in 1989. Always optimistic, George would
report on current matters and ask for advice from everyone on thorny legal questions, giving even the new
junior associates the sense that their participation was valuable."
In the American Lawyer’s 1992 survey, Wachtell’s associates rated it highly for client contact, level of
responsibility, collegiality among associates, treatment of associates by partners, training of associates,
associates’ knowledge of their partnership chances, and compensation.
O: "They’re pretty nice even though they’re tough. There are some law firms that pride themselves on
being mean. Wachtell doesn’t play those games. They’re not a bunch of mean pricks." O: "It’s an
interesting place and the people are fun. They’re interesting people to be with." C: "It’s a very informal
firm. You walk into Cravath, it’s a little bit stuffy. At Wachtell, they’re in their shirt sleeves. Nothing
oppressive, nothing standoffish. Some people might want more of a white-shoe atmosphere. We don’t.
These people are extremely smart and extremely capable. That’s what we want." C: "You get a different
feeling at Wachtell. Maybe collegial isn’t the best word but it’s the only one I can think of."
O: "Wachtell has limited itself to two or three disciplines, so when they talk about communication across
disciplines they don’t know what real communication problems are."
L: "The Firm is not a business; it is an old fashioned professional partnership; there is no partnership
agreement  only a handshake among friends." Lederman observed: "The ethic there [at Wachtell] is, if
you’re in, it’s your life. If you’re partly in, you’re out." S: "People here often don’t understand how
different other firms are. A lot of strange things happen in other firms."
Task Forces
L: "The Firm approaches all matters on a task force basis. An ad hoc group of tax, antitrust, litigation,
creditor rights, real estate, corporate or other lawyers, as needed, is formed for each matter. . . . The task
forces overlap with a particular lawyer leading one or more and assisting on one or more. There is
considerable overlapping of the composition of the task forces so that each matter has the benefit of the
best thinking the Firm can bring to bear on that matter." P: "Our success in takeover cases arose from
marrying different kinds of expertise. In the beginning, Wachtell was a small firm working for big
corporations, so we had to work together. Everyone shared every project. We had a collegial atmosphere.
We learned how to create task forces. Other firms had departments, and it took them ten years to learn to
make task forces." O: "They were a ragtag bunch of people who pulled together, bonded by the fact that
they weren’t tied to anything else."
P: "Task forces are the essence of expertise. Critical. Life and death. Other firms don’t copy task forces
well. People at Wachtell work together well. People know each other very well. There are few partners and
they have had long relationships. Lipton is exceedingly generous."
Management and Control
P: "This place would go bananas if we tried to put in systems and turn it into an efficient organization." P:
"Our overhead costs are twice that of most firms." Figure 10 graphs ratios of support staff to lawyers for the
largest New York firms during 1990 and 1991.
In his study of large Chicago firms, Nelson (1988, pp. 205-28) remarked on lawyers’ ambivalence about
power and organizational control. On the one hand, they speak of collegiality and every partner having a
say in firm governance; on the other hand, a very few lawyers dominate each firm, "not unlike the father
does in many families’ (p. 212).
P: "Management devolves on those who will do it." P: "Occasionally, we lean on people." In late 1991, four
people made case assignments at Wachtell: Herbert Wachtell and Bernard Nussbaum [now Legal Counsel
to President Clinton] did so for litigation, Leonard Rosen for bankruptcy and creditors’ rights, and James
Fogelson for major assignments and antitrust.
P: "Three committees manage the firm. The Administration and Coordinating Committees overlap. The
Recruiting Committee is the most important one." Who is on the Recruiting Committee? P: "Whoever
wants to be on the Committee shows up." P: "The Administration Committee handles paper clips. At one
partners’ meeting, no one knew who was on it." P: "Wachtell is a frustrating institution sometimes. It
doesn’t plan very well." P: "We need more structuring within the firm."
Martin Lipton says, "I have never gone to a committee meeting." P: "Marty doesn’t participate in
management but no one can do anything without consulting him so decisions get changed. There is some
grumbling about this."
P: "Suppose there is an issue as to whether we should take up a new matter from a nontraditional client.
This produces a group discussion in the creditors’ rights department. In corporate or litigation, the decision
is centralized."
P: "Up to now, policy decisions have been made by consensus. But 60 partners makes getting everyone to
agree very, very tough. Ten percent dissent can be overcome, but a 60-40 split leads to slow decisions.
Ultimately some kind of smaller decision-making system will have to get put into place. Now, a lot of
major decisions get made by the three main partners over lunch. If this system hadn’t been benevolent, it
would have been deposed." P: "Most decisions are made ad hoc, not at partnership meetings." O: "The
desire to stay small is an important feature of the way they do business. It allows them to maintain control
in a way that you can’t do in a larger organization."
P: "Twice someone at Wachtell has been involved in insider trading. In both cases, a small group made the
decision and someone was dismissed. There was no partnership meeting." O: "In [a small collegial firm],
how did they end up with two partners within a few years who became involved in insider trading? No
other firm that I know of has had two partners who did that. How did this happen?"
Rainmaking
Professional service firms generally give client relations higher priority than technical expertise (Starbuck,
1992). The experts with greater social skills become client-relations specialists, and these receive higher
compensation and wield greater power than other experts. Their power arises from the possibility that
client-relations specialists might depart and take long-term clients with them.
Informally, American lawyers put the label "rainmakers’ on the lawyers whom clients seek out. This term
symbolizes the mystery, magic, and power of client relations.
Most law firms reward rainmaking, of course, and Wachtell does not. P: "Getting new business is irrelevant
to people’s performance [ratings]. The criterion is always excellent legal work." P: "The only thing that
matters in terms of becoming a partner is whether you’re any good." C: "Of course, by doing such good
work, you don’t have to market yourself. Your work speaks for itself."
Some Wachtell personnel see the firm’s disregard of rainmaking as a corollary to its transactional practice.
P: "Wachtell isn’t dependent on long-term relationships with clients. Wachtell has a transactional practice."
P: "No clients account for more than 3, 4, 5, 10% of revenues, so we don’t have to worry about pissing any
clients off." P: "We have a huge client base. Many, many more client contacts than most firms, and they are
contacts at high levels. Not the assistant counsel. Usually the chief counsel, the CFO, or the CEO." P: "Our
clients are mainly lawyers who represent corporations’ and who know how to evaluate legal services. P:
"The firm tries to make all clients the firm’s clients rather than individuals’ clients." P: "Marty spreads it
around. Over the years, he’s succeeded in introducing the world to the rest of the firm. I think there is very
little question that the firm will survive the retirements of Wachtell, Lipton, and Rosen."
O: "The thing that distinguishes a Cravath, Wachtell, or Davis Polk is that the clients come to them because
they have big problems. They’re not looking for a lawyer they can schmooze with. With the high-pressure
investment banker, with the Type-A personality we usually see, there’s not much room for social skills."
Other Wachtell personnel worry that the firm may be undercutting its future. P: "We need more people
generating new business." P: "We haven’t spread rainmaking as much as we should have. We’ve been too
busy, so junior people haven’t been encouraged to rainmake. It’s happening now [during the recession]
more than it was however."
Still other Wachtell personnel are trying to make rain. P: "Rainmaking in our kind of practice is [a matter
of] doing a good job and getting to know other people. There is not a need for rainmaking [in another
sense]. We get business because we do a good job. We also have to stay in touch with clients." The latter
speaker then explained how he keeps in touch with clients. He has Wachtell’s library watch for ticker-tape
items and articles in the business press that relate to firms he regards as his clients. When the library turns
up an item on which he has insight, he telephones a senior manager or the corporate counsel, explains that
he has noticed the item, and suggests that the client consider doing such-and-so.
Marty
P: "Marty was leading. He recognized that M&A was a good way to go. We just followed him." P: "Marty
Lipton is a business genius. He has strategic planning insight." P: "Marty is charismatic, confident, usually
right, and he dominates. Herb is similar, yet they get along."
O: "Marty was one of the best securities lawyers in the country; there were maybe half a dozen others.
Unlike the others, Marty was not at a firm that would necessarily frown on aggressive hostile actions.
Unlike the others, Marty was willing to deploy task forces. Finally, of the great security lawyers, Marty had
the best business sense." O: "Marty is the most honorable guy. He doesn’t communicate any sleaze to
anybody." O: "Marty has a big ego and sometimes he comes across too strong." O: "I have very high regard
for Marty Lipton. He is a fine lawyer. He is innovative. He is superb with clients. He is the force at that
firm. They have other fine lawyers, but without Marty Lipton. . . ."
O: "Lipton’s genius was he chose to be on one side [defense against takeover]. He realized that they were
prepared to pay because . . . they were never around afterward. You couldn’t win so it was a matter of how
much money you could raise for the losers. Everybody hired Marty to keep them independent, but this just
wasn’t possible. I believe the financial results justified the earnings, and I believe [Wachtell’s] actual
earnings were much higher than" the estimates made by the American Lawyer.
P: "Wachtell has one phenomenal rainmaker. We’ve practiced in the puddle created by his rain. But he’s
not politically well connected or socially well connected. He’s an extremely good lawyer who makes
contacts because people want him to work on their cases." P: "Lipton would be sorely missed. His business
life is interwoven with his social life. He’s a genius and we all benefit from it." P: "Lipton is one of the
most brilliant lawyers in the US, maybe the most brilliant. He’s also entrepreneurial, and he networks." P:
"No one this side of the Mississippi could replace Marty Lipton. However, many lawyers in Wachtell have
close relations with various clients." P: "Marty is unbelievably smart. Comes up with these ideas." P:
"Marty is unique." P: "Even if Lipton’s not here, he’s here. ‘What would Marty say?"""
WHAT LIES AHEAD?
Will Growth Drive Wachtell Back to the Average?
P: "We need more associates, especially in litigation. Young people are willing to do the routine work.
They have more energy, more enthusiasm. Without young people you feel isolated, put upon. The young
work cheaper, so there is less client complaint."
Galanter and Palay (1991) argued that the up-or-out rule  which dictates that associates must either
become partners or depart  locks law firms into exponential growth. Maintaining constant sizes requires
firms to appoint new partners no faster than current partners retire or die. Maintaining leverage requires
having more associates and fewer partners. But associates remain so for only a few years whereas partners
remain so for many years, so to keep the same sizes, law firms must promote very few associates to
partnership. When firms grow, the ratios become more severe because there are fewer partners near
retirement and because firms tend to grow by adding associates rather than partners.
Galanter and Palay said that around 1960 the prominent New York City law firms were more or less in
equilibrium: They had 1.36 associates per partner, and they were promoting between one-seventh and onefifteenth of these associates to partnerships. They also allowed a few associates to hold that status
indefinitely. Firms outside New York had just 1.03 associates per partner, but they were promoting about
half of their associates to partnership. According to Galanter and Palay (1991, p. 36), "For big firms, circa
1960 was a time of prosperity, stable relations with clients, steady but manageable growth, and a
comfortable assumption that this kind of law practice was a permanent fixture of American life and would
go on forever."
What Galanter and Palay saw as comfortable stability, Katz, Lipton, Rosen, and Wachtell saw as
exploitation and bureaucratization. The story of Wachtell suggests that the structure of 1960 was promoting
the creation of new specialist law firms that did what they did better than their old, large competitors. In
1976, Brill (1976, p. 55) speculated, "Flom’s and Lipton’s success seems to be part of a trend in New York
that has seen younger firms spring up in the last two decades to challenge the supremacy of the old Wall
Street firms. The younger firms, many of which were started by Jewish lawyers who were not as welcome
then at the old-line firms, enjoy reputations among job-seeking students at major law schools as
‘sweatshops’ or as ‘places where the action is,’ depending on the student’s outlook." Because similar
developments were occurring in investment banking and financial brokerage, the new law firms could find
clients who did not have established ties.
From 1960 to 1985, according to Galanter and Palay, law firms adhered to the up-or-out rule while their
operations changed dramatically. Government regulations and an increasingly litigious society led
corporations to search for more specialized and higher legal skills. Many corporations terminated their
long-standing relationships with full-service law firms, created in-house legal departments to handle routine
matters, and divided their outside legal work among specialists in governmental regulation, labor relations,
mergers, pensions, taxes, and so on. The large law firms responded by bringing in former government
officials as partners, by raiding each other to obtain the specialists in greatest demand, by merging with
firms having complimentary specialties, and by expanding geographically. Most large law firms have
opened offices in Europe and in several US cities.
Nelson argued that Galanter and Palay overstated the importance of the up-or-out rule in these
developments and understated the importance of lawyers’ ideologies and their desire for profits. He (1992,
pp. 745-6) opined that "corporate law firms began to mimic the aggressive entrepreneurialism of the
corporate and financial actors they represented. In a corporate environment that did not value institutional
loyalty, traditionally oriented law firms risked looking flabby or out-of-touch." Furthermore, "corporate law
firms simultaneously define professional achievement in terms of status and economic returns’ (1992, p.
747). "Law partnerships maintain the promotion-to-partnership tournament, not because it is the only way
to arrange these exchanges, but because it is an effective surplus-producing mechanism" (1992, pp. 746-7).
Whatever the reasons, the large law firms grew 8% annually from 1975 to 1985. Since much of this growth
came through recruitment at the bottom, leverage went up. Leverage probably also rose because
competition among law firms for new graduates drove up starting salaries. In New York, leverage had risen
to 1.82 associates per partner by 1985; and Figure 4 says it had gone much higher in the top firms by 1990.
Although Wachtell has resisted an increase in leverage, it has not escaped growth. Some of its partners
wonder if Wachtell has already grown too big. P: "One hundred lawyers pose managerial problems 
personnel, recruiting, space, mail, word processing." P: "Participatory democracy doesn’t work as well with
100 lawyers as with 50." P: "Maintaining the culture was easier with 30 partners than with 60 partners." O:
"I don’t happen to believe that when you’ve got a hundred lawyers, there’s that great communication!"
Others wonder how much longer the firm can continue to expand without radically altering its culture and
standards. P: "Will growth dilute the partnership interest? Will Wachtell be a victim of its success?" P:
"Can Wachtell find enough new hires who are good enough to sustain the one-to-one ratio?" O: "The
biggest problem you run into with a large law firm is: the bigger you get, the more conflicts [of interest]
you get into. . . . It’s a huge limiting factor."
Wachtell has also resisted expansion to other sites. Responding to pressure from clients, Wachtell did
experiment with an office in London, but then closed it. P: "Our staff are ‘homegrown’. We need to
monitor quality. It’s difficult to do that with just one office; multiple offices make it an impossibility. We
don’t want to work with people we haven’t worked with before. We’ve been able to serve all the business
by getting on airplanes. Ours is a transaction business." P: "We believe that to survive, you don’t need 2000
lawyers all over the world. Of course, the world may pass us by; we may be an anachronism. We’re not
trying to do everything."
By contrast, Skadden Arps has allied with affiliate law firms in a dozen countries, and in 1990, it employed
1113 lawyers. Its senior partners say they are trying to build "a complete financial services company."
Does Wachtell Need Long-Term Strategies?
People in Wachtell debate the need for long-term strategic planning. P: "Wachtell needs an overall strategy
as the firm gets bigger. There may be trouble in, say, 1995 when the firm has grown to 140-150 lawyers
and the founders are gone." P: "We have no long-term strategy. Held a weekend meeting of partners. It was
a bust." P: "We held a Retreat two years ago to talk about how to identify what is most fundamental.
Everyone is struggling co-operatively with the issues. Three guys discuss the issues at lunch and agree, but
they don’t push their solution on others." P: "Do we need to plan? Yes. Lipton encourages us to plan. But
he’s the planner, together with Fogelson and Wachtell."
Others see little need for long-term strategies. P: "Our long-term strategy is ‘more of the same.’" P: "Fine
tuning will suffice. We have enough work for 150 partners." We think restructuring is going to be the next
five years. Litigation and creditors’ rights boom in a bad economy. Corporate goes the other way." P:
"People here believe that if you’re good at what you do and you do the best job you can, there will always
be people who come to you. The work will always be there. There’s not a whole lot of concern about the
future."
What Will Happen When the Founders Depart?
Marshall (1920, p. 316) remarked that "after a while, the guidance of the business falls into the hands of
people with less energy and less creative genius, if not with less active interest in its prosperity."
Wachtell’s founders see this issue and aspire to create an exceptional institution that will long survive them.
The example of Cravath Swaine shows that extreme excellence and unusual ways of organizing can
memorialize those who created them. Still, no one is confident that Wachtell’s excellence will survive its
founders’ departures.
O: "These were four extraordinary lawyers. Emotionally, if I were part of that firm, I’d feel enormous
gratitude to them." O: "Len Rosen  I’m told he’s the best bankruptcy practitioner in the country." P: "It is
a law-firm tradition: The original partners get diluted. The next generation is not a good as the founders.
Wachtell hopes to break out of this." P: "There’s a generation gap between the 30-year-olds and the 60year-olds." P: "The organization has to get over the parental problem. Wachtell, Lipton, and Rosen stand in
the parental role. The younger partners resist responsibility" for management. P: "We have to pass
relationships down to the younger generations." C: "I have a relationship with the two top people. I can call
Marty. I can call Herb."
O: "Why hasn’t it been repeated? There’s no question in my mind that it can be repeated. It hasn’t been
because lawyers are so risk-averse and we pay them so much." O: "I don’t think it’s a formula anybody
could follow but it could happen again."
James Fogelson, whom some regarded as Wachtell’s likely leader for the 1990s, died in September 1991 at
the age of 48. P: "Fogelson was a great administrator. He kept track of everything."
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