Holland & Knight announced today that it would be moving away from lockstep associate compensation. But unlike the firms that have rushed to jump on the Orrick-style, three-tier “pure merit” model, Holland is adopting a hybrid approach. Here’s how Holland & Knight managing partner Steve Sonberg explained it to associates this morning:
The base salary of an associate will no longer depend solely on seniority and the number of hours billed by an associate during the preceding year. Instead, the firm will evaluate each associate on the basis of both objective and subjective factors.
The objective factors will continue to include the number of billable and creditable hours. The firm’s existing policy on creditable hours is not being changed. In addition to the number of billable and creditable hours, the firm will now also consider other factors that objectively measure an associate’s contribution to the firm and to our clients (e.g., collections, profitability, significant matter responsibility, and successful client development).
The subjective factors will include professional and career development (including client development skills), the quality of the legal services provided to our clients, and other contributions to our profession, our communities, and the firm. We are committed to providing an evaluation process that clearly communicates to associates what is expected of them.
Under the new model, this combination of subjective and objective factors will be used to determine what kind of raise associates receive from year to year.
Above the Law spoke with Adolfo Jimenez, the partner at Holland & Knight who oversees the firm’s associate program. H&K’s new compensation plan is very different from the ones we’ve been seeing lately, and we asked Jimenez why the firm decided to go in a different direction.
According to Jimenez, Holland & Knight began working on a new system back in February. Regular Above the Law readers will remember that Holland laid off 243 people back in February, so it is not surprising that the firm decided to look at its model.
Jimenez explained that the firm wanted to align the components of what he termed the “three-legged stool” of the firm’s interests: partners, clients, and associates. Regarding associates, he said:
I’m convinced that if associates are divorced [from the compensation system], it’s not going to work. Associates have to feel like the firm is making an investment.
But he explained that the firm had to move away from a strict lockstep system because clients demanded it. Clients were concerned about the high cost of associate time — and partner time — and looking for discounts.
H&K looked at a lot of different compensation models, including systems like Orrick, but ultimately decided a three-tier system wasn’t the best fit for the firm:
Where we are in the marketplace, [a three-tier system] wouldn’t work…. Associates are looking for stability and certainty, and there is too much uncertainty [with the other systems]. Instead, we’re moving to a system with a lot of quantitative and subjective factors.
As we’ve seen on this site, one worry for associates at firms that have gone to a three-tier system is that the heightened performance reviews will be based more on office politics than “core competencies.” And that’s to the extent that anybody even knows what “core competencies” entail — some firms seem to be purposefully vague when it comes to explaining just what skills you need to advance to the next tier.
As Jimenez explains it, “It’s difficult to evaluate people simply based on subjective factors.” At Holland, the old, reliable billable hour will still play a significant role in determining career advancement:
Our system is more subjective [than the old system], but it still provides security and it still recognizes experience…. We want to preserve the benefits of the lockstep system that promote camaraderie.
The new plan at Holland will (somewhat predictably) also involve a drop in first-year associate salary. Orrick still stands alone as the only firm to come out with a fully formed non-lockstep plan that isn’t taking the opportunity to cut base pay.
H&K associates in the firm’s major markets had their salaries cut back in July. That cut appears here to stay.
But the firm’s new first-year attorneys will enjoy another haircut under this new plan: they’re going down to $130K.
The $130K salary won’t affect those currently at the firm, but going forward the Holland & Knight class of 2009 — set to arrive in January 2010 — will also get paid $130,000 in base salary when they are second years. But in their second year they’ll have an opportunity to make $5,000 – $45,000 in a “merit increase” as they move up a year.
It’s an interesting system. Will associates buy into it? Will it make partners happy? Will clients stop worrying about how law firms distribute their fees?
Read read the full statement from Steve Sonberg below, and let us know what you think.
HOLLAND & KNIGHT — STATEMENT — ASSOCIATE COMPENSATION
Earlier this year, we stated that the firm was undertaking a comprehensive review of our associate compensation system. Many in the firm expressed a desire for greater flexibility in our associate compensation system to recognize the contributions of our associates to the firm and its clients. In addition, a review of our system was necessitated by the severe economic downturn experienced by the legal industry, and the pressures brought by clients on law firms to reduce legal expenses.
We evaluated several alternatives to the firm’s historical lockstep (seniority based) associate compensation system that has utilized billable hour “tiers.” One of the alternatives studied, which has received considerable national attention in the legal community, involved (i) the elimination of lockstep promotion of associates and (ii) the reallocation of a significant portion of associate compensation from base salaries to bonuses through the compression of associates’ salaries into three tiers. After careful consideration, we have determined that our associates would be better served by less dramatic change to our associate compensation system.
We believe the firm’s existing associate compensation system should be modified to reduce some of the drawbacks of a lockstep compensation system and to achieve the following goals: (1) to reward an associate appropriately for his or her contributions to the firm and its clients; (2) to broaden the factors used to evaluate an associate’s contributions; (3) to rely on evaluation and professional development programs that more clearly communicate to each associate the firm’s expectations; (4) to incorporate significant flexibility in establishing an associate’s total compensation (including base salary levels); and (5) to provide Practice Group Leaders and Section Leaders with greater input in setting associate salaries. Beginning in 2010, we will implement the following changes to the firm’s associate compensation system.
The base salary of an associate will no longer depend solely on seniority and the number of hours billed by an associate during the preceding year. Instead, the firm will evaluate each associate on the basis of both objective and subjective factors. The objective factors will continue to include the number of billable and creditable hours. The firm’s existing policy on creditable hours is not being changed. In addition to the number of billable and creditable hours, the firm will now also consider other factors that objectively measure an associate’s contribution to the firm and to our clients (e.g., collections, profitability, significant matter responsibility, and successful client development). The subjective factors will include professional and career development (including client development skills), the quality of the legal services provided to our clients, and other contributions to our profession, our communities, and the firm. We are committed to providing an evaluation process that clearly communicates to associates what is expected of them.
A schedule of revised standard salary levels for associates has been posted on a newly created associates secure website on our intranet. The site is accessible from the left panel of the “HK Today” webpage. Each associate will be able to access the schedule for his or her local office. The schedule includes a range of merit-based adjustments. The standard salary levels on the chart will only serve as a starting point in establishing each associate’s salary. For 2010, the firm will generally move an associate to the standard salary level that corresponds to his or her seniority. Then, starting with that standard salary level, an associate’s Section Leader and Practice Group Leader may make a positive or negative merit-based adjustment to the standard salary level utilizing the objective and subjective factors described above.
As you will notice on the schedule, we intend for the merit-based adjustments to be significant. Those adjustments will allow the firm to reward those associates who are making the greatest contributions. We will continue to pay bonuses based on the same criteria that are used to determine salaries. The firm is committed to compensating associates at levels that are reflective of the geographic markets that we serve.
We plan to implement the modifications to the firm’s associate compensation system in early 2010, after all 2009 performance data is available and associate performance reviews are completed. Consistent with our historical timeframe for communicating associate compensation decisions to associates, we expect that Practice Group Leaders will meet individually with associates in their respective Practice Groups by the middle of February to discuss the associates’ salaries. Subsequent to that, the firm will pay merit-based bonuses based on associates’ 2009 performance.
We recognize that the economic downturn and the adverse impact that it has had on the legal profession, including the associate compensation changes we have previously implemented, have greatly increased the level of anxiety and uncertainty for associate lawyers. We believe that the modifications to the firm’s associate compensation system are the most advisable of the alternatives available to the firm. We know that our associates are vital to the firm and our ability to service our clients at the highest levels. Even in the midst of a difficult economic environment, we are committed to maintaining an associate compensation system that promotes the professional development of our associates and that rewards them for their important contributions to the firm and its clients.
Earlier: Holland & Knight Confirms 243 Layoffs
Nationwide Salary Cut Watch: Holland & Knight