Commentary: Leaving Lockstep Behind

Dan DiPietro

The American Lawyer

In 1729 Jonathan Swift proposed that Ireland's poor eat their young to prevent them from becoming a burden. The reaction to his satirical essay -- unsurprisingly -- was shock, disbelief and bemusement. This is not unlike the typical reaction I get from law firms to a far more modest but serious suggestion.

The proposal: Abandon the lockstep compensation approach toward associate pay in favor 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 toward 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 traveling around the country and to London to meet with senior firm management. (The group provides financial services to more than 600 U.S. and British law firms and more than 35,000 partners and associates individually.) Virtually everyone I encounter agrees that the key differentiator among firms is the ability to attract and retain the best legal talent. It's become increasingly difficult. But when I suggest that a more flexible approach to compensation would help, the idea is almost invariably greeted with skepticism, if not outright dismissal.

Firms would be well served to suspend 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 NALP, firms lose 80 percent of law school hires within five years. With the decline in law school applications in recent years, it's 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 percent of total compensation; at a typical Am Law 100 firm, they are 15 percent to 20 percent.

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 financial 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 program can effectively address all these issues. I believe that any performance-based associate compensation program 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 what it would under the current lockstep program.

• 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 attorneys who are well-schooled in mentoring techniques and ways to provide positive reinforcement and constructive criticism.

• 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 directed. Many demand a work/life balance that allows them to pursue other, nonlegal 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's 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 toward. Associates who know that their paycheck 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 programs to keep their top talent happy.

Firms should also consider formalizing 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 enrollment 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 toward 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 toward 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. Kansas City, Mo.'s Blackwell Sanders (now merged into Husch Blackwell Sanders) implemented such a system in 2001. Since then, according to firm 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 shouldn't be tied solely to individual performance. It should also be tied to the overall financial performance of the firm. With first-year salaries at or near $160,000, associates today already take a big chunk out of profits per partner. Since lockstep prevents them 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 firm profits makes associates more invested in the overall business of the firm, 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's no putting that genie back in the bottle! But from the third year on, firms could freeze salaries at current levels, explaining that from a certain point forward, associates will no longer receive automatic salary increases as their tenure progresses, but instead will be eligible for increasingly larger 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's 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 [see "The Revolutionaries].

The era in which lockstep compensation made sense has long passed. Lockstep originated because it was easy to administer and noncompetitive. 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 '60s 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 New York firms -- the majority of firms have abandoned that approach. The same reasons that firms got rid of lockstep compensation at the partner level -- the need to attract and retain top performers and to stay profitable in an increasingly competitive industry -- exist today at the associate level. 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. E-mail: dan.dipietro@citi.com.