In 1962, famous investor and later on Warren Buffett’s right hand man Charlie Munger formed a new law firm named Munger, Tolles, Hills, & Rickershauser, after defecting from his former firm Musick, Peeler & Garrett. The full circumstances behind that defection is covered in another case, but the brief details are as follows:
Munger started this new law firm out of a personal — and professional — obligation to his colleagues. In the late 50s, named partner Roy Garrett of Musick, Peeler & Garrett started having heart troubles. He brought on a new senior partner, who quickly became a problem. Charlie recalls that the new partner was a ‘control freak’, and that the attorneys — Munger included — chafed under his thumb. Eventually a fellow hot shot lawyer, Rod Hills, told Munger that he wanted to quit. Munger said he wanted to quit too. At that point, Munger had spent 13 years at the firm; he was 38 years old. Hills said that they could share office space; perhaps start their own firm? Munger told Hills that he didn’t want to practice law anymore. Hills responded with “ok, but so long as I can use your name.”
Munger, Tolles, Hills, & Rickershauser was more accurately described as a group of ‘superlawyers’ in those early days — a collection of established lawyers who banded together, in many cases bringing their clients over from Musick, Peeler & Garrett. Hills said that Charlie was instrumental to bringing the new firm’s first tentpole clients. Rod Hills left in 1974, becoming White House General Counsel to President Gerald Ford, and later becoming chairman of the Securities and Exchange Commission. Munger left in 1965, to pursue full-time investing. Ron Olson — whose name was later added to the firm’s brass plate — was recruited to the firm in 1968.
“Two weeks before our son was born I told my wife I was going out to California to take a look,” said Olson to Janet Lowe, for her biography of Charlie Munger. “I came back and told my wife I thought we ought to go. Why? I never met a more interesting group of people. Charlie was not with the law firm. But his values were very much part of it. I heard stories about him when I was recruited, and to this day, recruits who come through this firm hear Charlie Munger stories.”
Given this history of defection from a rabid senior partner, Roy Tolles, Charlie Munger and Rod Hills set out to be create a ‘democratic organisation’, to have their new firm meet the highest standards of conduct, to recruit only the best, and, ultimately, ‘build the finest law firm anywhere’.
Part of that was the partner compensation system.
The following is taken from Janet Lowe’s Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger.
Munger, Tolles is known for creating a democratic and fairly unique compensation system designed to make the firm a meritocracy. As a result, when conditions are right the highest-paid partner can earn at least five times more than the lowest paid. Every January the partners — there are now 62 — get a ballot listing the names of all the partners with a blank after each name. The firm's net income for the previous year is printed at the bottom of the ballot.
Each partner fills in the amount of money he or she thinks every participant should make, with no rules other than that the numbers must add up to the net income for that year. “There are no points, no shares, no extra credit for seniority. When the partners vote, they can take seniority into consideration, but they also consider a person’s ability to find business and represent clients successfully. ‘“We vote on disbursement, then everybody gets to see how everyone else voted,” explained Olson.
”There isn't a compensation committee — a lawyer-by-lawyer pitch on how valuable he or she was to the law firm. It's a whole different dynamic. Rod, Roy [Tolles], and Charlie together were the ones who came up with the process. It's a yearly check on how you are perceived.”
After the ballots are in, the firm then plots the numbers and names on a grid, allowing each attorney to see how he or she ranks in the eyes of every other, by name. The compensation committee reviews the numbers, talks privately with each partner, and then settles on a final compensation figure. The system, claim the partners, encourages good manners. People think twice before riling anyone who will influence their salaries.”People have said this must be very brutal,” says John Frank, a Munger, Tolles partner. It is open, but it's not brutal. You can't give a whole lot of money to one person without taking it away from others, which imposes a certain civility on things.”’
Today, Munger, Tolles & Olson has topped The American Lawyer A-list a record nine times, and maintains the highest average A-list ranking in the history of the award. In a 2023 job description, the firm notes: “Our firm has expressly rejected the high-leverage law firm model. We believe in leanly staffed, high-quality deal teams, typically with a 1:1 partner to associate ratio.”
A Daily Journal profile in 2012 contains the following description of the partner comp process:
Every January, partners at Munger Tolles pore over a grid that lists all of their names, and they are asked to insert the compensation they believe they are due for the prior year and how much money they believe their partners should receive from the profits.
“It’s the most humbling thing I’ve ever done here. Maybe the most humbling thing I’ve ever done, period,” said trial lawyer Bart H. Williams. “The minute you start thinking that you’re big and bad, all you need to do is listen to the successes and the things that the other people here have done.”
Sources
The primary source for this case was Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger.
Secondary sources include:
This job description from MTO’s website.
Los Angeles Daily Journal — How Munger Tolles defied the rules and built a national law firm.
Above The Law — For Whom The Munger Tolles: A Peek at Partner Pay