It must be a slow news week over in mainstream media land. Earlier this week, the New York Times did a survey piece about American salary cuts that tangentially touched on lawyer salaries — old news for people on top of the legal market, but probably new to a more general audience.
Today, the Boston Globe is getting in on the lawyer pay action. Its report focuses on the move towards merit-based associate compensation that’s been happening for at least a year:
Boston’s top law firms are dramatically changing how they pay young lawyers, adapting to a changing market by adopting Wall Street-style compensation systems that rely on performance bonuses for large shares of annual earnings.
Major law firms have traditionally hired junior lawyers at six-figure salaries and awarded annual increases based on the number of years at the firm, a system known as “lockstep.’’ But several of Boston’s largest and best-known firms are telling associates that they no longer can count on automatic raises. Instead, they will receive salaries and bonuses based on how partners assess their performance.
Wall Street-style compensation, is it? Well then, I guess we should expect bonuses in Boston this year to be all over the map, instead of in strict lockstep with what peer firms end up paying…
We’ve done a number of posts about the pros and cons of merit-based compensation. But before we start comparing these plans to how investment bankers are paid, we need to see some proof that firms really want to pay their top associates meritorious wads of cash come bonus time.
Last year, we did not see that proof. Check out our bonus coverage. What you’ll see is that Cravath set the market and nearly everybody fell in line. Lockstep, non-lockstep, whatever — for the most part, most firms followed the Cravath scale. Only a few firms made significantly large off-scale payments to top performers, and even then those outlier bonuses were only available to a couple of people. Merit-based compensation + industry standardized bonuses = top performers getting screwed.
Meanwhile, for partners, PPP continued to go up, in some cases on the backs of associate salary cuts or layoffs.
That’s not exactly how Wall Street does it. When times are good at the top, workers on the floor get more than just a trickle. When times are tough at the top, people get fired. It would be inconceivable for JP Morgan to wait for Goldman Sachs to tell it how much to pay out come bonus time — especially if JPM happened to do better than GS in one year.
But thus far, the firms that have been calling lockstep “outdated” when it comes to associate salaries have been all to happy to fall into a lockstep line during bonus season. Could that be changing?
At Nixon Peabody, a 700-lawyer firm with headquarters in Boston and New York, bonuses now account for up to 30 percent of associates’ pay, except for first-year lawyers, who receive a set salary. Bonuses are based on a variety of criteria, ranging from billable hours to pro bono work that is done without payment to the firm, said Andrew Glincher, who runs the Boston office.
“Our clients are looking for value, and that means rewarding our best performers and making sure we don’t lose them,’’ Glincher said. “You could have a second- or third-year who is a superstar earning more than someone who is in their fifth year.’’
The minute I see Nixon Peabody paying high-performing third-years more than WilmerHale pays low-performing fifth-years is the minute I’ll believe firms are serious about merit-based compensation as a viable alternative salary structure (as opposed to a short-term, cost-cutting solution).
Until then, I think we should hold off on comparing the Boston legal market to the way they incentivize people in downtown Manhattan.
Law firms rethinking pay system [Boston Globe]
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