Changing Fortunes: Lawyers Surpass Bankers in Pay as Law Firms Offer Lucrative Compensation Packages

In a significant shift in the financial industry, lawyers are now outearning bankers as law firms adopt new compensation structures and offer lucrative packages to top talent. While bankers' pay has remained stagnant for all but the highest performers, lawyers have experienced remarkable growth in their earnings, especially at top law firms.

Traditionally, investment bankers commanded higher salaries than lawyers, but the tide has turned. According to compensation experts and pay data spanning over 15 years, managing directors at banks who are not in high-ranking leadership roles make an average of $1-2 million per year, including bonuses, which has remained relatively unchanged over the past two decades.

In contrast, equity partners at leading law firms now earn around $3 million or more annually, more than triple the amount they earned twenty years ago. Exceptional partners who generate substantial business can earn over $15 million per year at firms like Wachtell, Lipton, Rosen & Katz; Kirkland & Ellis; and Paul, Weiss, Rifkind, Wharton & Garrison.

The reasons behind this shift in fortunes are multifaceted. Corporate lawyers have evolved from mere contract markers to quasi-bankers, providing advice and guidance to corporate executives as they navigate regulatory challenges and complex issues like succession planning. Moreover, the rise of private equity has significantly increased the workload for law firms, as private equity clients have become more active over the past two decades.

Law firms have also transformed their compensation structures, moving away from the traditional lockstep pay model that solely rewards seniority. This has led to fierce competition among firms to attract top talent, resulting in bidding wars reminiscent of sports teams vying for star players. Kirkland & Ellis, in particular, has been instrumental in driving this competition by aggressively recruiting partners from rival firms, offering deals worth $20 million or more annually for the first few years.

While most law firms raise their prices by around 4% each year, exceeding inflation rates, banker deal fees remain relatively static. Top lawyers now charge more than $2,000 per hour for their services. The highest-performing partners at major firms can earn over $15 million annually, and a select few even surpass $20 million. Despite their demanding work schedules, these lawyers reap substantial rewards for their expertise and contributions.

In contrast, bankers have faced pressure from regulators, rising expenses, and a shift towards selling the reputation of large banks rather than individual bankers. Average compensation for managing directors at top-20 investment banks, excluding those in leadership roles, has not shown significant growth since the 2008 financial crisis, even with a standout year in 2021. Lower-level bankers are earning less on average than they did before the crisis.

While bankers' pay still exceeds the median U.S. household income, the changing landscape has led to fewer bankers retiring in their 50s with sizable fortunes. However, top bankers, particularly those at independent advisory firms like Centerview Partners, can still earn eight-figure salaries or more in a good year.

The shifting dynamics between lawyers and bankers reflect the evolving nature of the financial industry. As law firms offer increasingly attractive compensation packages, lawyers have emerged as high-earning professionals, rivaling the once-dominant bankers on Wall Street.