Abandoning lockstep pay would go a long way towards solving the crisis in associate recruiting and retention. And it would serve firms better financially, writes Dan DiPietro
In 1729 Jonathan Swift proposed that
The proposal: abandon the lockstep compensation approach towards associate pay in favour of a system that aligns pay with the performance of the individual associate and the firm, and significantly shifts the bulk of total compensation to this variable component. A performance-based pay structure would go a long way towards helping firms keep top legal talent, and it would serve firms better financially.
As client head of the law firm group of Citi Private Bank, I spend much of my time travelling around the country and to
Firms would be well served by suspending their disbelief. Despite their professed desire to reduce turnover — and notwithstanding the short-term drop in turnover this year due to the economic slowdown — firms have been bleeding associates. According to the National Association for Law Placement (NALP), firms lose 80% of law school hires within five years. With the decline in law school applications in recent years, it is going to get even harder for firms to recruit and retain top talent.
Exacerbating these discouraging numbers is an associate pool that finds that law firm life largely does not meet its goals, and is more willing than ever to ditch it for something else.
So where are law firms falling short? I would start with lockstep compensation. Even firms that have moved away from pure lockstep still pay only a small percentage of total compensation on a variable basis. In the corporate world, bonuses routinely represent more than 50% of total compensation; at a typical Am Law 100 firm, they are 15%-20%.
Lockstep is an illogical, ill-conceived approach to pay that addresses none of the issues faced by today’s associates, who bring a wide range of goals and degrees of commitment to their jobs. Neither does lockstep help firms address other concerns, such as client complaints about what they consider to be excessive associate pay and the expense and inconvenience of high associate turnover. Finally, lockstep complicates tough economic times. Associates are expensive and, with a locked-in pay structure, they can become a real burden during a slowdown. In fact, for many firms, this chicken will come home to roost in 2008.
On the other hand, a properly-administered performance-based associate pay programme can effectively address all these issues. I believe that any performance-based associate compensation programme should include the following elements:
- compensation aligned with the performance of the firm and the individual;
- a limited base salary and a variable component with plenty of upside potential. In a year in which the firm and individual perform well, total compensation can be higher than it is in the current structure. But in a year in which the firm does not perform well, both it and the individual are at least partially protected. In an average year, the amount of money spent on associate compensation would not differ dramatically from the current lockstep programme;
- clear goals for associates, agreed upon before the start of the fiscal year;
- built-in feedback, delivered at least quarterly, so there are no surprises at year-end;
- supervising lawyers who are well-schooled in mentoring techniques and ways to provide positive reinforcement and constructive criticism; and
- multiple success tracks for associates, with appropriate compensation trade-offs.
Today’s associates are a different breed from those of 25 years ago. Then, it was assumed that everyone was gunning for equity partnership and would work like crazy to get there. Now, associates are not as uniformly motivated. Many demand a work-life balance that allows them to pursue other, non-legal interests or obligations. When they don’t get that balance, they walk. Even associates who don’t have other commitments tend not to be as focused on the brass ring of partnership.
As for associates who want to become equity partners and are willing to work hard to get there, the slowed growth in equity partner ranks and increasing reliance on lateral hires send a discouraging message.
Associates of all stripes complain that their firms lack robust and effective professional development, mentoring and performance feedback mechanisms. Many firms are starting to implement improvements, but when all or most of an associate’s pay is set, it is far too easy to place such initiatives on the back burner. When pay is disconnected from performance, feedback has real meaning only at the extreme ends — if the associate is solidly on track to partnership or is in danger of being fired.
In contrast, meaningful feedback and set goals are integral to a performance-based system. They give associates something concrete to work towards. Associates who know that their pay cheque depends on how well they do will have a real incentive to improve, and thus be more likely to take advantage of professional development and mentoring opportunities.
In addition, performance-based pay gives partners an effective means to encourage their star performers and boost the performance of mediocre associates. Nearly every law firm would pay its top performers more to keep them. A lockstep compensation system not only prevents firms from doing so, it forces them to pay mediocre performers at the same rate as stars. Knowing that mentoring, training and feedback will all feed into associate compensation, partners should also be more willing to put the time and effort into such programmes to keep their top talent happy.
Firms should also consider formalising the associate management function. Partners — under pressure to bring in business, bill hours and win their matters — typically have not done a great job of managing associates. Firms have a rare opportunity to give this function to someone ideally situated to take it on — baby-boomer partners who would like to reduce their professional commitments but are not quite ready to break out the hoe. Offering these partners the opportunity to manage associate development allows them to stay engaged and involved in the firm while freeing up full-time partners to devote themselves to their practices.
Among the associate ranks, plenty of solid performers would be willing to take a financial hit if it meant they could devote more time and energy to other commitments. Firms have a need for such lawyers, especially as law school enrolment declines. That’s where multiple success tracks come in. In such a system, associates advance along four or five tracks based on performance, as measured against a defined set of competencies. Associate compensation, billing rates and progress towards partnership are all tied to levels of competency, rather than hiring class. Top performers are fast-tracked, which means they are paid more and move towards partnership in a quicker, more predictable fashion. Associates in the other tiers are paid less and billed out at lower rates. Such a system makes clients happy, since they know they are getting what they pay for.
By effectively addressing the diverse goals, commitment levels and skill sets of associates, a multitrack performance-based pay structure can dramatically reduce turnover. Blackwell Sanders (now merged into Husch Blackwell Sanders) implemented such a system in 2001. Since then, according to the firm’s management, associate attrition has declined by more than half. Less churn pleases clients and it also helps cut down on the expense of lateral recruiting and replacement.
Pay should not be tied solely to individual performance. It should also be tied to the overall financial performance of the firm. With first-year salaries at record levels, associates are already taking a big chunk out of profits per partner. Since lockstep prevents law firms from reducing associate salaries during a slowdown, firms are forced to take less palatable measures, such as layoffs, to cut costs. In good times, of course, associates will reap the rewards of healthier profits. Aside from making financial sense, compensation tied in part to profits makes associates more invested in the overall business, since their take-home pay rises and falls to some degree with that of the partners.
With any performance-based system, certain things need to be kept in mind. First, it should not apply to the first two years of an associate’s career, since those years are really about training. Also, starting salaries are what they are — there is no putting that genie back in the bottle! But from the third year on, firms could freeze salaries at current levels, explaining that, after a certain point, associates will no longer receive automatic salary increases as their tenure progresses, but instead will be eligible for increasingly large performance-based bonuses.
While in the legal industry performance-based associate pay may be as rare as snow in July, it is hardly a radical notion in the broader business community. In fact, firms need look no further than their own clients to see performance-based pay systems in practice, since it is the way businesses typically pay and promote their top performers.
A handful of early adopters in the legal industry are starting to embrace the idea. As has been widely reported, Howrey announced last June that, starting in January 2009, it will replace lockstep with a tiered associate compensation system tying pay, billing rates and progress to a specific set of competencies.
The era in which lockstep compensation made sense has long passed. Lockstep originated because it was easy to administer and non-competitive. It worked initially because enough associates actually wanted to make partner, and viewed partnership as an attainable goal. Law firm life was also easier. According to the American Bar Association, lawyers in the 1960s billed an average of 1,300 hours. Partners and associates were also paid a whole lot less.
Years ago, most firms used lockstep compensation to pay their partners. Although there are still a few holdouts — particularly among large
In the spirit of Swift, it is time for firms to junk their archaic lockstep compensation system and replace it with performance-based pay. The proposal may be modest, but the payback for both law firms and their young talent would be enormous.
Dan DiPietro is client head of the law firm group of Citi Private Bank. A version of this article also appears in the August edition of The American Lawyer, Legal Week’s