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December 22, 2010 2:38 PM

Bonuses Cast Spotlight on Merit-based vs. Lockstep Divide

Posted by Ed Shanahan

By Steven Harper

This year's bonus announcements highlight the continuing battle between merit-based and lockstep associate compensation systems. Some firms adhere to Cravath's approach: Each associate class gets the same amount--as the firm said, "billable hour or other similar criteria do not apply" and "virtually all associates will receive the full bonus." Other firms make distinctions--usually based on billable hours--that mean huge dollar differences within a class.

Which system should associates prefer?

Many firms that abandoned lockstep in favor of merit-based compensation a year ago are now reversing course. The prevailing explanation is backlash. Associate dissatisfaction pervades big law--some saw "competency models" as thinly disguised efforts to reduce associate wages. Restoring lockstep, the argument goes, should enhance morale.

But when firm leaders decide they really care about morale, they'll ask associates to evaluate partners on mentoring, training, and overall humanity--and, at least to some extent, partner compensation will reflect the results. Instead of looking into those unpleasant mirrors, managers are likely to form a new committee investigating the "associate problem," as if it were a mystery.

One way to improve morale would be to tell associates the truth earlier. But delivering a quality merit review is tough work. And doing so properly is not in most large firms' short-term economic interests. For starters, the reviews take time--time the partners can't bill to clients.

When I chaired my firm's associate review committee in the 1990s, the process focused on a single goal: Identifying the best associates among a distinguished group. That meant evaluating specific skills, identifying developmental needs, and considering future prospects. To squeeze out personality conflicts and internal politics, partners from outside their assigned associates' practice areas gathered the necessary performance information. Then the committee actually deliberated for an entire day.

In an era when lateral partner movement among firms was rare, promotion decisions were akin to choosing a new family member. Admittedly, subjective judgments produced the distinctions, but partners generally played fair with the next generations. And, while it's somewhat self-congratulatory to say so, the integrity of the process produced widespread respect for outcomes.

In those days, compensation didn't turn on billable hours. High outliers (those billing over 2,400 hour a year) were singled out and counseled in a way that is nonexistent today: "If you burn out, you're no good to us or anyone else."

Low outliers (below 1,600) elicited a different concern: "Partners aren't giving that person work. Why? Is there a performance problem?" Between those extremes, hours had little impact on reviews or compensation. As incredible as that now sounds, it was true throughout the world of The Am Law 100. Just ask the senior partner who is pressing you to "get your hours up."

Transparency worked. Knowing their relative position allowed associates to handicap prospects while they were most marketable. Performance ratings translated into monetary distinctions that spoke for themselves. Anyone displeased with the message could explore other options.

New York firms pioneered lockstep. Exploding client demand caused many more firms across the country to follow. Uniform compensation to a class allowed partners to postpone the day of reckoning for those with limited futures. Unpleasant news went undelivered.

Some partners rationalized their failure to provide more candid feedback: "We need the bodies to run our business. We're paying them decent money. So they're doing okay."

The first two points were true: A myopic MBA-mentality emerged, and departing associates often found that their new positions paid substantially less than they had been making. But doing okay? Some lost their jobs, their lifestyle, and chunks of their self-image in a single belated conversation.

Lockstep also was supposed to improve morale by reducing internal competition. But as compensation packages ballooned, associate satisfaction plummeted and voluntary attrition skyrocketed. Bonuses tied
to hours, but unrelated to quality, eroded meritocracies and morale--as does boring work that doesn't enhance attorney skills.

Modern megafirms now face the toughest task. To perform legitimate merit-based reviews, partners must develop meaningful individual assessments for legions of associates--sometimes hundreds in a single office. Without proof that the exercise contributes to the bottom line, what incentivizes firms to devote the nonbillable time required to perform reviews diligently? Management's concern for the future, you say? At most big firms, that means projecting next year's profits per equity partner. They're counting on laterals to fill quality gaps.

Associates should be skeptical if their firms now are promising merit reviews and quality feedback, especially if the only meaningful distinctions are hours-based. But lockstep that camouflages meaningful information is no panacea. Student loan repayment demands notwithstanding, sooner is better than later when it comes to acquiring the knowledge that frames life's most important decisions.

 

Steven J. Harper is an adjunct professor at Northwestern University. He recently retired as a partner at Kirkland & Ellis, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at www.thebellyofthebeast.wordpress.com. A version of the column above was first published on The Belly of the Beast.

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What this article demonstrates is that the BigLaw business model is a dinosaur living on borrowed time. When "merit" reviews are dependent upon how many useless billable hours one churns out, one is no longer a member of a profession - you're no better than the kid who went to work on the factory floor right out of high school.

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