No question is posed to me more frequently these days than, "What does this
economic environment mean for law firms?"
To which the only sensible answer is, "It’s way too soon to predict anything
for sure, but each firm’s own situation is sure to differ." Indeed,
it’s true that we’ve seen layoffs at Cadwalader, Clifford Chance, Thacher Profitt,
and as of yesterday Thelen Reid, as noted on
the WSJ Law Blog. Yet I’ve also had conversations with managing
partners who tell me that the first quarter of 2008 is shaping up to be as
strong as any last year. So what’s going on?
I’ve written about this environment before, and recently, as in:
- "Prospects for 2008"
- "Think
Different. Who, Me?" - "Don’t
(Only) Sweat the Small Stuff" - "Glass
Not Half Full" - "A
Contrarian Bounce?", and - "The
Upcoming Banana?"
If I had to summarize where I stand, I’ll reiterate that at this stage in
the cycle I remain a "worried optimist."
But since loudly and confidently declaring one’s economic predictions is essentially
a mug’s game (as the joke has it, "you could lay all the economists in the
world end to end and they wouldn’t reach a conclusion"), the real question
is, What should you do?
I have a thought: Let’s re-examine associate lockstep.
Again, this is not the first time I’ve written about this; in "Fealty
to Anachronisms,"
I reported last June on Howrey’s ditching associate lockstep. But it’s
time to revisit the issue.
To begin, it helps to step back and take a deep breath before we ask probing
questions about a custom we take so very much for granted—one which has
been ingrained as a core element of the "Cravath System" dating back to the
turn of the prior century.
But if you look at our industry’s practice of compensating associates from
the perspective of corporate America—or even from the perspective of
the putative "man in the street"—I’m put in mind of nothing
so much as the New York Times music critic reviewing an early Verdi
opera with an especially preposterous plot: "If I tried to explain to
you why Ernani kills himself, we’d be here all week and at the end you wouldn’t
believe me anyway."
Isn’t that about right? How on earth is it that we’ve brainwashed ourselves
to believe associate lockstep makes sense?
I submit that in no other business does compensation turn almost solely on
year of graduation or year of admission to the profession. Are we right
and the rest of the for-profit economy wrong? If you’re with me at least
to this point, now is the opportunity of an economic cycle to re-examine this
hoary tradition.
The moment’s propitious because, regardless of one’s views of the health of
our revenue streams going forward, savvy attention to cost is always a virtue,
and given the recent spike in associate salary "going rates," real money is
at stake. (I might add that clients appear irrationally anything but
exuberant about the associate salary spike. This may make zero sense
economically but it seems to clients to make great sense psychologically. Ignore
it at your peril.)
How then might you wean your firm away from associate lockstep? Start
by taking a page from the playbook of firms, such as Howrey and notably Latham,
that have done it already. Some ideas:
- Create "bands" rather than "years," and group associates past the first
or second year into perhaps three such bands of seniority. - Within each band, which would have a minimum, median, and maximum salary
range, determine the place of individual associates based on 360° assessments. - Permit, indeed encourage, deviations from seniority; that is, after all,
what this is all about. Why not have a third-year who’s a superstar
earn more than a fifth-year who’s hanging on by their fingernails? - Deviations from seniority achieve a number of salubrious objectives:
- They tell the truth to associates about how the firm views their performance;
- The associate’s costs begin to more roughly approximate their value
to clients; - The firm can more wisely target its scarce salary and bonus dollars
to those it wants to keep, now divorced from the artificial constraints
of lockstep year-by-year compensation; - Billing partners are liberated from the awkward conversations with
clients about associates’ increased rates; if a client notes that a particular
associate’s rate has gone up, it’s not because another year has ticked
over on the calendar, but rather it’s because the firm has decided that
associate’s performance—and value to the client—has increased.
Perilous times are often the most conducive to change. As a managing
partner said to me, "Change is easiest when the house is on fire." Don’t
wait for the house to be on fire.
But explore creative alternatives to business as usual. Your partners, and your
associates, will thank you for it.
Update (24 March):
A 3L at a heavy-duty law school writes (reproduced by permission, but anonymously):
"Hi, I am currently a 3L at […]. I
very much agree that firms should move away from lockstep pay, but I do wonder
whether an economic downturn would be a feasible time to do it. I will be
starting at a firm in the fall, one of the "bulge bracket" NY firms that you
refer to, and it occurs to me that now would not be the time to implement this
there. Two of the largest and most profitable practice groups are litigation
and M&A (unsurprisingly). I have been told that M&A is fairly cyclical
and litigation is mildly counter-cyclical, that the partners are aware of this
and that they fully expect hours to fluctuate accordingly. However, the M&A
people have been working their tails off for the past few years under lockstep
pay. If this program is implemented now, the M&A people will probably
resent the fact that it is starting while they have to sit on their hands,
rather than in the last few years where they put in superlative hours. Furthermore,
lockstep pay helps to avoid causing people to fret about their reduced hours
during downturns in business, whereas lockstep pay might cause competition
for work that might damage the firm’s atmosphere. More generally, how should
firms thinking about switching to merit pay deal with fairness between different
practice groups that operate according to different business cycles?"
He raises an interesting point, one I did not address in this piece
initially, which is why I wanted to append his question and my thoughts.
Which are two: First, to the extent variable compensation under my hypothetical
scheme would include a material component reflecting hours billed, our faithful
correspondent is correct that timing issues and practice group cyclicality
will all but ensure that someone’s ox is gored during the transition
from lockstep. There are ways to solve or at least ameliorate that,
of course, and were someone to actually ask me to advise on such a transition,
I’m quite certain I would recommend a "glide path" during the transition that
would even out any capricious inequity. After all, everyone knows what’s
hot and what’s not: You just have to address it as adults.
But second, implicit in his question is the assumption that a large portion
of the variability in compensation would reflect the absolute level
of billable hours. I don’t know if I implied that in the original piece,
but now that the predicate is laid bare, I will plead to only the most tepid
endorsement of that assumption. More precisely, I will endorse the notion
that "more hours means more $$" within the scheme I outlined only
with the following understandings:
- There’s an important distinction between the workload of a practice area
overall and the hours billed by any individual associate.- It’s unfair to penalize associates for a low overall level of activity
in their group—if
that’s anyone’s fault, it’s the partners’ (or the economy’s). - Conversely, I believe it’s not only fair but the soul of meritocratic
capitalism to reward individuals for hours at the right of the bell curve
within their group and to ding individuals at the left.
- It’s unfair to penalize associates for a low overall level of activity
- But the heart of my proposal as I envision it has almost nothing to do
with hours and everything to do with professional development and progress
along the curve of being a high-performing practitioner. What I care
about are:- Pure legal excellence: Analytic ability, attention to detail
while not losing sight of the big picture, an instinct for getting to
the core of a matter. - Writing and speaking clearly, effectively, and precisely.
- Being able to team with colleagues within the firm, up, down, and sideways.
- Client relationship skills—beyond dutifully reporting what clearly
has to be reported—extending into the realm of potentially excellent
client service overall.
- Pure legal excellence: Analytic ability, attention to detail
A thought-provoking followup. Thank you (and you know who you are).
