Lockstep Compensation – Fair or Foul?

by Timothy B. Corcoran on April 28, 2009

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Today’s Above the Law continues its recent theme of suggesting that law firm leaders are doing a disservice by culling associate ranks and rolling back associate compensation.  Further, ATL questions whether there really is a more equitable compensation arrangement than lockstep, which provides equal and increasing compensation to each incoming class of new lawyers.

“It seems to me that moving away from lockstep compensation necessarily leads to more subjective forms of salary advancement. The billable hour might be the bane of a lawyer’s existence, but it is at least based on objective criteria. Will putting salary decisions in the hands of intra-firm politics and relationship building really lead to a “kinder and gentler” law firm? Or will it lead to an “eat-what-you-kill” approach that many partners complain about when it comes to their compensation structure?”

In a word, this is madness.  Let’s alter our frame of reference, stop navel-gazing, and pretend that we’re in the real world for a moment.  No one has a right to the status quo.  It’s human nature to advance, and it’s necessary to innovate to survive, because an upstart with a better mousetrap will eliminate demand for your offerings eventually. This isn’t unfair, it’s merely progress. As demand for legal services has plummeted, there is no sustainable financial incentive for law firms to continue paying associates at rates equated with the near-unlimited demand of yesterday.

This isn’t about whether these young lawyers deserve such high pay. Who’s to say? Sure, the starting salary is huge compared to the entry-level pay in other disciplines, but if demand is greater than the available labor it’s a natural outcome. Notwithstanding the many law firm leaders who inflated associate compensation in an arguably misguided attempt to boost recruiting, if we’re prepared to accept that graduates of top schools deserve high pay when in demand, we should accept that absent demand that pay will decrease.

As for lockstep compensation, there is nothing equitable at all about this.  Blanchard and Hersey pioneered the principles of situational leadership years ago.  A leader adapts to the circumstances and to the particular skills of each individual.  A person who must be micro-managed on one task may be left alone with confidence for another. A person who is an expert in one area may be a novice in a new area, and so must be managed differently in each instance. The inequity comes when leaders treat all workers equally. Why should an expert, whose contributions are measurably better, be treated and paid the same as a novice?  We may lament the sports superstar who shirks certain duties, but we can’t quibble with paying him more than journeymen teammates who contribute substantially less to the Won/Loss column.

Law firm leaders who are able to measure the productivity of their associates should feel no hesitation at paying differential compensation.  Imagine the brilliant 2nd year associate who out-earns the 7th year senior associate based solely on her substantial contribution to a favorable outcome as defined by the client.  Is this measurable in billable hours?  Perhaps.  It’s also likely that other subjective criteria will come into play.  Welcome to the real world.

Most businesses pay employees on a differential basis, typically based on performance.  Even employees starting new roles at the same time may receive different pay because one may have more work history or is a better negotiator.  Every so often HR professionals will embark upon a rationalization process but this is usually just a thinly-veiled cost-cutting exercise by management or a job protection exercise by HR.

The fact of the matter is few organizations even try to adhere to a lockstep compensation if they wish to incent innovative, customer-focused, winning behavior by their employees.

Is this done perfectly, where compensation is awarded based solely on measurable performance? Of course not. There are politics and favorites and poor data quality and short-sighted budget constraints which impair any organization’s ability to act perfectly. But that’s no reason not to try.

None of us can watch the demise of the US automotive industry and not feel compassion for the many displaced workers along the supply chain.  Similarly, there’s nothing wrong with lamenting the loss of income and prestige experienced by BigLaw associates who are as capable today as they were yesterday.  The market is a tough teacher.  When demand returns, associate compensation will increase.

However, my suggestion to law firm leaders isn’t to merely cut associate compensation and call it a day. It’s time to take a good, hard look at the “business” of the firm.  Which practice leaders are in their roles due to longevity, political considerations or rainmaking ability?  These are generally poor indicators of success in a role that requires attention to detail, coaching others to success, long-range thinking, and an all day every day client focus.  Which practices or lawyers are not profitable, not lead generators or not part of the firm’s legacy?  Why are they still here?  Does your compensation system not just incent but require cross-selling?  In other words, do lawyers receive a substantial portion of their compensation from generating work for others?  If the compensation system primarily rewards solo efforts, then are you better off as solos?

But before we say goodbye to lockstep compensation, let’s remember that it’s all about execution. Multiple types of compensation plans can achieve the desired result if implemented properly. So let’s move off the red herring of associate compensation, either the amount or the structure, and focus on the real opportunity to thrive in a down economy:  help clients identify their business challenges, quantify the impact of not acting, and customize a solution to help them accomplish their objectives.  Few clients are overly concerned with the state of BigLaw; they have their own problems to deal with.  And they could use your help.

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