Professional Services Accounting ARTICLE -
Moving from lockstep to performance-based Associate compensation
Target Audience: Legal Professionals, Professional Service Firms, Law Firm Partners, Law Firm Marketers
Law firms increasingly are moving away from the historic lockstep compensation model, in which firms award associates with a raise and a step promotion each year, to a new system that recognizes individual performance and results in variable progression and compensation. While these systems offer some clear benefits, the transition to a new system can run into some common hurdles.
Need for change
Law firms are considering a change in compensation systems for a variety of reasons. The most obvious is the weak economy: They can no longer reasonably expect to see growing profits and escalating billing rates every year. This is likely to make a more flexible compensation system very appealing to some firms.
Firms also feel the need to respond to increasing client concerns about the cost of associates vs. the value they bring to the table, based on their limited experience. Clients understandably question whether they should be charged high rates for attorneys who often are still learning their craft. But, with a lockstep compensation system that virtually guarantees associates a certain amount of compensation, it can be difficult for a firm to reduce their billing rates.
Further, a system that caps the amount of compensation and progress a high-achieving associate can realize may squelch motivation. Worse, it can lead to frustration, resentment and attrition.
Performance-based attributes
Unlike a lockstep system, a performance-based system doesn’t assure attorneys of progression (such as an annual raise and promotion) simply for meeting minimal pass/fail standards. Rather, decisions on compensation and advancement are based on the attainment of specified key competencies that top-tier attorneys must master. Thus, an outstanding second-year associate potentially could earn more than a mediocre fourth-year colleague.
Performance-based systems generally provide associates with clear guidance and the ability to determine their professional advancement. And they allow firms to reward and, ideally, retain their most talented attorneys.
Common transition issues
Some firms that plan to convert to a performance-based system end up foiled by common challenges, including the following.
Lack of planning. Announcing that the system will change before the firm actually does the necessary planning is a recipe for disaster. The firm must first determine how it will implement the required changes in structure and processes. Without those changes, many associates will continue to advance through the firm with their classes, and the benefits of performance-based evaluations will be lost.
Weak evaluation process. Often, firms overlook the importance of revising their evaluation processes. Constructive, informal evaluations that are performed periodically throughout the year are an indispensable component of performance-based systems. A 2007 Hildebrandt survey found that associates frequently complained about partners who: 1) rarely gave direct, clear criticism, but instead awarded similar grades to everyone, or 2) shred associates without providing constructive feedback or guidance for overcoming their weaknesses.
These two extremes illustrate the need for the evaluation process to be objective and consistent among different partners. If partners use significantly different approaches to evaluate associates, it will undermine the system and its integrity.
Continued focus on traditional metrics. Firms must avoid the temptation to equate performance with hours billed or profits. Focusing on billing preempts one of the primary benefits of a performance-based system — encouraging attorneys to concentrate on the good of the overall firm rather than short-term individual profitability.
Associates should be evaluated based on their relevant soft and hard skills. Soft skills encompass those traits that seed an individual’s success in an organization, such as time management, interpersonal skills, client relations and teamwork. Hard skills relate to technical competency and include research and analytical abilities, written and verbal communication, and courtroom prowess.
transition to a performance-based system Worth the work
Don’t let the necessary planning and structural changes deter your firm from making the transition to a performance-based system. Just remember to communicate the criteria of the compensation structure to your attorneys in advance of the year in which the system will be implemented. Once implemented, the system can lead to greater firm flexibility, as well as client and associate satisfaction.
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