February 19, 2010

Pay For Performance Models In The Legal Profession

Compensation based on pay for performance models is not new to corporate America, but it is practically unheard of in the law profession, until recently. Law firms are now seriously considering abandoning the traditional and long-established lock-step compensation system for a more rigorous pay-for-performance system. What could have prompted such a radical move given the legal profession’s wide reputation for being adverse to change?

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Law firms have not been unaffected in the economic downturn. Many have seen profits decline due to less work. Billable hours from client companies have dropped and all but disappeared in some cases. The client companies who remain on the law firm’s books are giving much greater scrutiny to all expense items, particularly their legal fees. According to Stacy K. Humphries, a Texas-based lawyer and a legal search executive with Pye Legal Group, “Companies are now refusing to pay high billing rates for first year lawyers to work on their legal matters. Some have gone so far as to demand that no first year law associate be assigned to their legal matters, period.”

Stacy, who stays very close to developments within the profession, has seen both sides of the issue. She began her legal career in a major law firm and later shifted to in-house legal counsel. She states that, “Firms will often assign a first year associate or less experienced lawyer along with an experienced lawyer to most legal matters. The less experienced lawyer is providing a level of work to the client but is primarily learning on the job from the more experienced lawyer. What companies are doing now is refusing to pay for training on their time and money.”

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What’s a Law Firm to Do?

Law firms have long subscribed to the “lock-step” system of compensating their law associates. Lock-step systems establish a step system of compensation primarily based on length of time on the job. Each new associate enters the firm at the same rate as his or her peer and year after year their compensation rates move up step-by-step. Today, the larger firms in Houston, TX are starting first year associates at approximately $160,000 a year. If the firm cannot assign enough hours to provide an appropriate level of training, they lose all around. The firm will have a highly compensated, yet inexperienced lawyer who can only be assigned to a limited amount of work. This is where pay for performance comes into the picture.

When it comes to compensation, there are two opposing philosophies that exist. One philosophy is centered on entitlement and the other around pay for performance.

In an entitlement-centered compensation system, the basis for pay is time in position, without serious consideration for performance differences. It is assumed that if you are still in your position, you are deserving of an increase and it is automatically granted.

Pay for performance models take a much more strenuous route. These systems require that performance be the most significant factor in whether and what level of a pay increase you might receive. There are no guarantees. Differences in performance are to be reflected clearly in the compensation level. Individuals in the same position have the potential to be compensated very differently. Payfor-performance structures permit companies to compensate top performers well above what would be considered average and to provide cost-of-living adjustments or no increase at all for below average performers.

Meeting Customer Demands and Managing Costs

Law firms are looking to this pay-for-performance structure to allow them to respond to their customer demands and manage their costs while still appropriately preparing their first year and less experienced law associates. DLA Piper, the second largest law firm in the US, has already put into place a new structure based on performance. DLA announced that its firm managers will base pay on “value delivered to clients and the firm, not tenure or hours”. When it comes to law firm compensation, minimum billable hours and time in position has taken a back seat to performance based on meeting client expectations and the firm’s definition of value.

To affordably continue to develop less experienced associates, DLA Piper and others who are considering this shift, have reduced starting pay levels for first year associates and have shifted a larger percentage of pay into variable components versus base pay. Stacy commented that, “This move may allow firms to go back to their clients with lower bill rates permitting them to keep first year associates engaged in their work or it may allow the firm to implement more effective associate development programs for addressing this need.”

An honest focus on the needs and requirements of the customer started this shift in the typical law firm salary structure. Making such a dramatic change in compensation work for the firm on a long-term basis will take much more of an inward focus.

Regards,

Vivian L. Mora, SPHR
Mora&Associates HR Search and Consulting

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