DLA Piper: Taking the Merit Based Model Out for a Spin

There has been a lot of talk about DLA Piper’s new merit based compensation structure, and a lot of that talk has not been pleasant. Associates are pretty bummed that they’ll be starting at $145,000 with 15% of that salary deferred until the end of the year if they hit their performance marks. We noted those concerns earlier this month.
But there is a memo going around the offices of DLA Piper. It appears to be unsigned, but tipsters report that the memo is something that DLA management put together. It offers a very different viewpoint on the new DLA structure.
Whoever made the memo, it’s a full-throated defense of the firm’s decisions. Let’s take a look after the jump.


The memo starts off by acknowledging some of the criticism of DLA’s new compensation system:

We wanted to follow up with you on the rollout of the TMS. The response has been consistent with what we were advised to anticipate by our consultants. We expected there to be a range of reactions, with the loudest resistance from those with a perspective either uninformed by the current market conditions or relatively indifferent to client attitudes and our longer term goals as a firm. The need for improvement in the quality of associate development and alignment with the strongly held views of our clients has received only secondary acknowledgment.

As we’ve noted before, nobody has released any studies or statistics to support the claim that clients care about associate compensation as much as they care about associate (and partner) billing rates. But law firm managers (and their “consultants”) keep telling us that clients are really concerned with how law firms pay their own people. It’s their business, I assume they’re telling the truth.
Will clients also care if associates are sabotaging colleagues, refusing to share knowledge or credit, backstabbing their peers, and doing all of the other things people are known to do when they are trying to “gun” for the head of a curve? Only time will tell.
Of course, what is truly unique to the new system is the 15% of salary that DLA is holding back from its associates until the end of the year. That provision is addressed head on in this memo:

Most negative comments unsurprisingly revolve around the holdback until year end of a portion of compensation, mis-characterized by some as a “salary cut.” Some even express skepticism as to whether we will honor the core commitments integral to the program as presented – namely, that (1) the firm will spend as much or more on total associate compensation compared to the current system, (2) 70% of our associates will do better financially than under the current system, (3) our top performers will enjoy an accelerated path to partnership and higher compensation compared to the current system, and (4) the firm will make an increased investment in development, training and feedback.

To be clear, the base salary of $145,000 is a salary cut for associates making (or expecting to make) $160,000. DLA admitted that it was a salary cut, back when the firm, you know, cut salaries. This new system makes that old salary cut permanent. Remember, Orrick is doing a substantially similar program but the base salary is at $160K.
And at Orrick, there is no holdback.
But like I said, this memo is a full throated defense of the holdback provision:

You have probably heard some of these comments. We thought it would be helpful to share both our own thoughts and those of a couple respected observers of the legal profession.
First, to review the basic rationale for the holdback – by paying less to those judged the weakest contributors, we are able to pay more to the 70% who are evaluated as strong contributors. Given our starting premise – associate compensation expense per capita should only increase modestly in 2010 – it is the incremental reallocation of the held back amounts that allows us to conform to this premise and meet our goal of enhanced rewards for our most valuable associates. As partners we hold ourselves to a performance standard that impacts our annual compensation directly, up and down, and our clients hold both our firm and their own employees to a similar “pay for performance” standard. The moral of the last year is clear – entitlement thinking needs to be put behind us in favor of bringing our internal approach to evaluation and compensation into alignment with the expectations of our clients about the value equation underlying our relationships with them.
Second, this program is not about, and is generally irrelevant to, the firm’s income statement or balance sheet. We would think this obvious given that the aggregate amount of the holdbacks is in fact less than one percent of our revenue, and at our borrowing cost, the “time value of money” on these dollars for the full year is about .0001 of our revenue. Nevertheless some comments even raised this issue. The important point is a determination to pay more to those who deliver more, and less to those that deliver less, and to use compensation to provide incentives for the behavior we want. People are free to either agree with that approach or not, but we believe this core value is central to the future success of the firm. We intend to continue looking for ways to strengthen the firm and align ourselves better for success in the more difficult operating environment that has evolved. On a related note, our total outstanding debt will be exactly zero as of 12/31/09, as it has been every other year in the firm’s history. We have increased our paid in partner capital over the last year and substantially reduced the amounts we pay out during the year to partners. As the economy improves we will drive our overall borrowing during the year down further. Put most simply, a 15% holdback on associate compensation mirrors (at a modest level) our approach to how we all compensate ourselves as partners; a side benefit of these changes will be the elimination of the culture shock that accompanies this aspect of the transition of our newly elected partners.
Third, our goal is to have our top performing associates be among the highest paid of their law school classmates in the country. We pay close attention to the competitive marketplace, and by way of a reference point, this year the bonus levels at most of the “charmed circle” firms will top out at $30,000. We have already announced a plan with a 2009 bonus range materially higher than that, and the concepts reflected in our Talent Management Program will allow the top-rated performers among our senior associates to earn total compensation well over $300,000 next year. As the program develops and top performers are able to jump levels, we fully expect our goal to become the reality. Our top performers will be paid at that level because under our more developed evaluation program we will be confident of the value they are delivering to clients – using criteria based on value creation for clients and the firm and not just billable hours.
At its core, this new system forces differentiation and rewards outstanding performance. It is the opposite of the pass/fail lockstep progression toward partnership and billable hour based compensation grids that have characterized most law firms in the past. This change is difficult for a generation raised to expect very high and ever increasing compensation from the moment they leave law school, and it is precisely the imposition of the requirement for differentiation (the much-maligned grading “curve”) that has driven much of the negative reaction, coupled with the concomitant effect on timing and amount of compensation. When we discuss this reaction with clients or others in the business world, the cultural disconnect becomes obvious. David Barnard, the founding partner of Blaqwell, a consultant to many leading firms, characterized our new approach as one that “will enable us to explain with considerable clarity what clients can expect from the associates staffed to their matters. We believe this is positive because we want to define and deliver uniformly good work across the firm. Our recruitment policy and the current abundance of applicants ensures that all of our associates are good, but we are ambitious, want to improve and we now have a system in place that will ensure we become consistently better, but this is a big change and will take time.” As to comments we received arguing that a holdback is unfair because it reduces the amount received during the year by associates who decide to leave the firm, or who are not well graded, our own view is identical to Mr. Barnard’s, who wrote “It seems reasonable to expect those who earn this should demonstrate, over the year, the commitment and contribution to justify being paid the full amount.”

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It seems to me that the common thread in all of these complaints that DLA is dealing with is “trust.” This new compensation system requires associates to trust that DLA Piper partners will keep their word about total compensation, that associates will be fairly evaluated, and that the firm won’t use the absolute top payout as an illusory goal to mask what DLA is paying the vast majority of its people.
It’s all well and good to say that the top performing DLA associate will make more than his or her peer at a similar firm. But what about the second best? What about the tenth best in a firm of 3,500 attorneys? Any system will produce winners and losers, but what will the average experience be for a DLA associate? Right now, it is not at all clear that the middle 50% of DLA associates will do better than the middle 50% of associates at peer firms with a lockstep system on a $160K scale. In fact, it appears that the middle 50% will do worse (and we won’t even talk about the bottom 30% at DLA).
So, the people who are going to like this system are the ones who really think they’ll be in the top percentile of the firm’s associates and are willing to risk being sorely disappointed in their own performance. Unfortunately, the vast majority of lawyers are risk averse — its how a lot of people ended up in law school in the first place. Based on the reaction DLA is getting, it appears that the risk of working hard yet making substantially less than your peers is outweighing the potential of making more if you happen to hit the subjective (and potentially arbitrary and capricious) performance review indicators. For it to work, DLA associates have to trust that the firm will be fair.
But one can understand why DLA is having a little bit of a tough time gaining the trust of its employees at the moment. It’s been a pretty rough year at the firm. DLA laid off 180 people back in February. It showed another 121 people the door in July. DLA has cut salaries, deferred the incoming first year class, deferred the 2009 summer class. One side effect from all these moves seems to be “skepticism as to whether we will honor the core commitments integral to the program.”
The memo goes on to make the hard sell to its employees and potential recruits:

We also turned for comment to Peter Zeughauser, a leading law firm consultant who also counsels with many large corporate users of legal services. Unlike David Barnard, Peter was not directly involved in helping shape the program, but his broader points about the marketplace bear setting out in full:
“I am increasingly coming to the point of view that 2010 will be different from 2009 in that we will see one or more AmLaw 100 failures, probably second half of year. It depresses me, but I don’t see how it can be avoided. Improving cash flow while the economy recovers, making you stronger through the year, allows you to keep more associates longer. It is a zero game in the end. It may be a very tough reality that more associate lay-offs will be necessary. I don’t know the answer to that now. But, this policy seems to push that decision back as long as possible, no? And, it allows you to more likely get the money into the hands of the sticky people you want to keep. I don’t know what to say about associates who in this environment don’t want to bite their lips and share the pain with the partners and at the same time keep more of their peers employed. But, I can tell you this: unless they are off the scale super stars, if they leave DLA, they are going to be in one tough job market; they risk their career coming off the rails. Even off the chart super stars are likely to be out of work for the foreseeable future.
I am not unmindful that a lot of associate griping and unhappiness is also unhealthy. For the good associates who are griping, a couple or more partners need to get them in small groups or one on one and sober them up. Or, if you like, I will talk to them. Sometimes reality isn’t pretty; this is one of those times. Tectonic plates are moving. They may move slowly, but we will likely get at least one big shocker this year. Prudent fiscal policy, tough love, I don’t care what you call want to call it. It is important to keep the hatches battened down because it is going to another tough 9 to 12 months. We are still in the trough, and it isn’t yet clear when material improvements will begin to occur.
Anyway, I am an optimist and things will get better, and you guys are extremely well-positioned for the direction in which the world is headed. But, it isn’t time yet for the big exhale, or even a little exhale. It’s tough, and the associates have to continue to share the pain. At some point in their careers, when they are 30-year partners, if not before, they will be glad they did, because they will be able to look their associates in the eyes and tell them what it was like and what they did, and that may silence some whining.
There remains only one guy in the world who can just print more money. Think of the mess we would be in if there were more. Everybody else has got to be very prudent about what they do with what they’ve got. This problem is one to worry about when everybody’s hours are healthier. Otherwise, you may be worrying about much worse problems.
We are committed to continuing to manage the firm to assure its strength, both in terms of financial health and the increasing quality of our lawyers and commitment to client service. That commitment was recently recognized by our outstanding finish in the survey conducted by BTI Consulting (whom we have not historically hired) who surveyed 240 corporate counsel and concluded that DLA Piper ranked among the top five firms for client service or the “Best of the Best” in this category. BTI noted that “Clients laud DLA Piper for exceptional client service in several activities, such as Client Focus, Anticipates the Client’s Needs, Provides Value for the Dollar and Understands the Client’s Business.”
We are confident, as David Barnard notes above, that this program will assure continued achievement in all these respects over time.
The punch line from our perspective is that we need every partner to identify the associates that you believe have the right stuff to be successful contributors over the long term and help them see the bigger picture and the benefits of a more merit-based, upwardly mobile associate development structure in a firm better aligned with the clear needs and demands of our clients.
We understand that a reaction to a material change affecting compensation arrangements is inevitable, and we expected and planned for the ensuing dialogue to explain our strategy and the benefits to associates in terms of overall financial rewards and substantially greater investment in their career development. We are equally clear, however, that the firm is not well-served by an ongoing environment of complaints after appropriate dialogue, or folks who are not prepared to parallel the steps being taken at the partner level to adjust to the current business environment. We have a backlog of top law school graduates to whom we are committed that are eager to come to work sooner than currently scheduled, and the marketplace is full of quality lawyers that have been let go by top firms due to tough times.
So while we are always prepared to listen, and have committed to review the program at the end of 2010 for any adjustments, at some point in the near term we will need to call the question. We need associates prepared to sign up for a program of increased spending on overall associate compensation, merit-based differentiation, higher compensation and advancement for top contributors, and greater investment in training and development programs. We should part company with those who refuse to suspend their disbelief and make a good faith effort to support this initiative.
The firm is in a strong position both financially and in the competitive marketplace. We are pleased that we will soon announce a new partner class that is actually larger than last year – a high quality group that will be part of our long term success. We have announced a renewed commitment to associate development, and alignment of our associate systems with what clients have told us we need to provide, and we are confident that over time it will provide an increasingly strong foundation for our future. Please communicate these basic principles to our associates along with our enthusiasm for this new program.
Thanks for all you do for the firm

I imagine that these lines will sting the associates that DLA fired over the course of 2009: “I don’t know what to say about associates who in this environment don’t want to bite their lips and share the pain with the partners and at the same time keep more of their peers employed. … But, I can tell you this: unless they are off the scale super stars, if they leave DLA, they are going to be in one tough job market; they risk their career coming off the rails.” It seems strange to highlight sharing the pain after the firm threw so many careers “off the rails.” But I guess reminding surviving associates how terrifying it is to be without a job is one way to decrease the “griping,” over the new pay structure.
Another way to deal with the griping is to just threaten to fire people who disagree with the new program. And the whoever wrote this did that pretty clearly with the “we should part company with those who refuse to suspend their disbelief and make a good faith effort to support this initiative,” line. Ahh, that’s the smell of good morale building.
But isn’t “suspen[sion] of disbelief” something that they usually ask for in Sci-Fi movies? When I go to see Dances with Thunder Smurfs, I’ll suspend my disbelief. When I go to work, I usually want to have a healthy appreciation for what is real, and what is fantasy. But maybe that’s just me?
How many people are persuaded by the DLA argument here? One DLA tipster is still not impressed:

I hear they now have plans to roll out a new GCS (gladitorial compensation system) in 2010 that will pit new associates against starved lions. Whomever survives would receive the holdback.

You know, one thing to consider is that the kind of hyper-competitive, “to the victor goes the spoils,” environment that DLA is trying to create will be very attractive to a certain kind of person. Perhaps those kind of people are not working for the firm right now. But over time one would hope that people who don’t want to be in gladiatorial combat over their salary will find other firms to work for, while the ones who like this stuff will flock to DLA.
If this is your thing, it seems that DLA Piper is eager to meet you. Just don’t come crying if you end up bleeding out on the sands of the DLA coliseum.
Earlier: DLA Piper: Killing Lockstep Follow-Up
DLA Piper Gives Back 10% of the Salary Cut

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