The official title of the NALP conference panel that I attended on merit-based compensation contained a playful shout-out to Sarah Palin: “How Is That Performance-Based Compensation System Working for Ya?”

The panel was originally supposed to have featured a representative of the now-defunct Howrey law firm. So the snarky answer to the question presented might be, “Not well.” (In fairness to merit-based compensation, however, Howrey’s dissolution didn’t have much to do with its model for training, promoting, and compensating associates.)

No mention of Howrey was made during the introductory remarks (or anywhere else in the discussion, for that matter). Rather, the panel focused on the positive — and offered useful advice for firms that are contemplating adoption of performance-based systems….

The panel description:

Responding to the recession, a noticeable number of firms shifted to a compensation system based in whole or part on associate performance. Now two years or more into those systems, how are they working? Representing many parts of the country, this panel of experts will examine the landscape and ask whether others will follow.

And the panelists:

  • David Cruickshank, Consultant, Kerma Partners, Moderator
  • Carolyn Bortner, Director of Lawyer Development, Orrick
  • Siobhain McCarthy, Managing Director of Global Attorney Development, Paul Hastings
  • Cheri Vaillancour, Director of Professional Development & Legal Personnel, Fenwick & West

Cruickshank began by noting that recruitment imperatives and reputational concerns — “we cannot be seen to be second tier” — work to entrench lockstep compensation. He then outlined several different types of possible systems:

  • lockstep salary and lockstep bonus
  • lockstep salary and varied bonuses based on hours
  • lockstep salary and varied bonuses based on performance (but perhaps with hours creeping back in as a factor)
  • lockstep for a certain number of years (e.g., two years), then individualized compensation, negotiated with each attorney (more prevalent at smaller firms; harder to administer at larger firms)
  • a “levels and promotion” system (attorneys can be promoted early or late, within a certain window; their compensation and billing rates will change as their competencies improve)

Each panelist then described her specific firm’s system:

  • Fenwick & West: The firm moved to a competency-based system in 2010, with three levels of associates: Tier 1 (years 1-3), Tier 2 (years 4-6), and Tier 3 (year 7 and up). The firm treated 2010 as a transition year and is adjusting the system in 2011 based on what it learned last year.
  • Orrick: The firm has three groupings of associates: associates, managing associates, and senior associates. Associates are on lockstep for the first three years. Bonuses are merit-based, with practice group leaders having discretion over how to allocate their bonus budget. The firm also has a custom-track arrangement that allows associates to step off the partnership track, as well as career associates, who perform more commoditized and whose salaries and bonuses are individually determined.
  • Paul Hastings: The firm has lockstep compensation and merit-based bonuses, tied to associates’ competencies. The firm has had merit-based bonuses for five years and competencies for two years.

Based on their firms’ experiences, the panelists offered advice to firms that are thinking about adopting performance-based systems:

  • Give yourself enough time to transition to this system. A great deal of legwork is involved. The panelists recommended between 18 and 24 months for the process.
  • Make sure you have sufficient buy-in from the different constituencies at the firm for the move to a performance-based system. This should involve focus groups or internal conversations, with both partners and associates, in order to address concerns. The greater the buy-in, the greater your chances of success.
  • Consider using a consultant to help you with the process. (Paul Hastings did; Fenwick did not.)

Cruickshank asked the panelists: What was the top obstacle faced by the firm in implementing a performance-based system? Bortner of Orrick and Vailancour of Fenwick cited the intensive partner involvement required in the process, both in terms of adopting the system and administering it going forward. McCarthy of Paul Hastings cited the way that the lawyerly desire to always have the last word made drawing up the competencies quite challenging.

Given the challenges involved in moving to a performance-based system, what is the business case for having one? According to McCarthy, “Competencies are a management tool, not just a compensation tool — they’re a way to improve, expand, and manage delivery of services to clients.

Bortner concurred. She added that a merit-based system makes a firm’s star associates feel appreciated. Partners like the system because it allows for superstars to be promoted early — and for their billing rates to be raised accordingly. In response to a question from Cruickshank, all three panelists said that their firms have associates who have been promoted early and are therefore ahead of lawyers who have been at the firm for longer.

The floor was opened to audience questions. One question focused on how firms can assuage associate concerns over inadequate compensation (i.e., that merit-based systems are really just a strategy for cutting pay). Cruickshank noted that one approach is to place associates on lockstep for their first few years at the firm, to allay these fears. McCarthy suggested that the top priority should be retaining star associates: “You have to reward performance, or you’ll lose your top performers.”

Another interesting issue was that of bias. Is it possible that a non-lockstep system will result in diverse associates being penalized, perhaps because they don’t connect for whatever reason with the partners who are doing the evaluating?

The panelists acknowledged the importance of the issue and the risk presented, but said it could be addressed. Vaillancour explained that Fenwick worked closely with Professor Joan Williams of UC Hastings, founding director of the Center for WorkLife Law and an expert on diversity issues, to develop a bias training program for partners. She added that, under Fenwick’s merit-based system, many of the associates who have progressed ahead of class have been minorities and women. Bortner noted that Orrick also brought in a diversity consultant, who conducted programs on unconscious bias.

Performance-based systems do raise logistical challenges. One questioner asked about how merit-based systems handle work allocation, since partners generally want to work with the top associates. How do you make sure that associates are developing different competencies when partners discover a talented associate and want to work with that associate again and again, perhaps on similar matters involving similar tasks?

According to McCarthy, ideally a firm’s work allocation system should be constructed around the competencies. Firms can also have internal career coaches to help with associate development.

I asked whether one advantage of a merit-based system might be encouraging the attrition of underperformers, by holding them back in terms of seniority and pay so that they grow frustrated and leave. The panelists did not embrace this analysis. Bortner noted that Orrick’s associate development model, which includes career coaches on both the East Coast and the West Coast, has actually helped underperformers improve as lawyers. McCarthy agreed, observing that Paul Hastings provides extensive resources to help associates enhance their skills.

This raised the issue of associate evaluations. Cruickshank asked the panelists whether associates receive written copies of their performance evaluations. Associates and Orrick and Paul Hasting do receive their evaluations, and associates at Fenwick receive summaries of their evaluations. All the panelists stressed how much the quality of associate performance reviews has improved since their firms moved to merit-based systems.

This improvement in the review process jumps out as a major virtue of a performance-based system. These systems force firms to focus on their attorneys’ development, instead of just mindlessly bumping everyone up a year (in salary and in billing rate) come January. If a firm ties pay and promotion to performance, it will have to pay more attention to performance — which would seem like a good thing, for firms, for associates, and for clients.

But as the discussion made clear, there’s a lot of work involved in moving to a merit-based system, and there’s a lot of work involved in administering the system going forward. Think about all the (non-billable) attorney hours involved in this process.

Is it worth the cost? Why are some firms, including some of the most prestigious and most profitable, still on lockstep? And are there ways for a more-or-less lockstep firm to get some of the benefits of a merit system, such as an improved performance review process and an enhanced focus on associates’ professional development, without adopting a full-blown system of multiple tiers and complicated “competencies”?

(This is what we’ve arguably seen on the bonus front over the past few years. Firms have maintained a largely lockstep approach to promotion and base pay, but they’ve started to use variable bonuses to reward superstars and punish laggards — a way of introducing a merit element without having to develop a complex new system from whole cloth.)

In the end, when it comes to the merit-lockstep debate, only time will tell; the market will judge. If firms with performance-based systems start to significantly surpass lockstep firms — in terms of servicing and attracting clients, keeping their lawyers professionally satisfied, bringing in lateral and entry-level talent, or whatever measure one wants to focus on — then the trend may spread.

If not, though, then don’t expect much movement on this front. Lawyers are risk-averse and empirically driven; they don’t like to shake things up unless the evidence is compelling. Law firms are slow to change; they prefer evolution to revolution.

And can you blame them? In recent years, one prominent large law firm decided to depart from the usual Biglaw model, in multiple ways. It experimented with alternative fee arrangements for its clients. It adopted a merit-based system of pay and promotion for its associates. It replaced the standard swanky summer program with a “bootcamp.”

We don’t need to remind you of the identity of this firm. Howrey going to forget Howrey?

Earlier: NALP 2011: Law Firm Transparency – From Black Boxes to Glass Houses


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