Roundtable: Remuneration and talent management

Lockstep or merit-based pay: which is more effective in managing legal talent? Four HR specialists share their experiences with Editor Manju Manglani at Managing Partner’s latest roundtable.

Participants:

Charlie Keeling, HR Director, Field Fisher Waterhouse

Penny Newman, Director of People & Knowledge, Lewis Silkin

Jo Larbie, HR Director, Bircham Dyson Bell

Nigel McEwen, Legal Services Director, Cedar Talent Management

What kind of remuneration system does your firm have in place?

Penny: My firm currently has a zero to nine-year PQE lockstep system for associates. We publish all of our salary spines and bonus structures on the intranet, so everyone knows what everyone else is earning. The spines reflect the external market and we publish how we have arrived at our decisions which we have set for the year.

We recently discussed with our associates whether we should move towards a different system. Some of the associates said that if they wanted a merit-based kind of assessment – which you might say is a more competitive system – they would go to a different firm with that remuneration system in place.

For partners, we have a competency framework called the ‘partner seven roles; it’s basically a description of seven roles, with indicators and sub-indicators, behaviourally stated.

Jo: My firm’s remuneration system for associates is less tied into PQE. When we introduced the competency model a few years back, we moved very much more into being performance based, so people move through the levels on that basis.

For partners, every year we have the partner PDRs with the managing partner and head of department, looking at not just the financials, but also what they’re doing, how they feel, their leadership and management, developing others, business development and contribution to the five-year strategic business plan.

Charlie: We moved away from PQE banding for associates in this year’s salary review. When I joined the firm I was amazed at the traditional method of rewarding associates, i.e., giving them a pay increase for basically being a year older regardless of whether they were good, bad or indifferent performers! We decided to develop a competency framework, which we implemented a full year before changing the approach
to remuneration.

For equity partners, we’ve had a modified lockstep process in place for six years now. This consists of a lockstep element (first-tier units) which accounts for about 20% of total remuneration and a merit-based element (second-tier units) which accounts for the rest. It’s a totally transparent process.

Our fixed-share partners are evaluated each year using very similar criteria to those above.

Nigel: My background is as a former managing partner, where I was in the post for nearly 11 years and introduced a move away from lockstep in my firm, which was very challenging.

As an HR consultant, I’ve looked into many law firms’ remuneration systems and given some advice on how they can be restructured.

How does you firm recognise and reward non-billing activities?

Charlie: Our previous lockstep system did not give sufficient scope to reward differentiated performance; the fire tended to go out of the belly of plateau partners. I’ve found the more merit-based approach has led to more honesty and transparency of performance and reward – everyone knows what it takes to progress and there are enough checks and balances in the evaluation to avoid mistakes or perceived favouritism.

It has led to a more open approach to client attribution and thereby a more collaborative culture. Also, outstanding performance is recognised and rewarded, while poor performance is dealt with in an empathetic way, giving partners the chance to improve. If they don’t, their units are reduced to such a level that they are encouraged to leave the firm. It isn’t just about being the biggest biller, other contributions and behaviour play a big part in the evaluation.

As well as the financial contribution, other factors used in the assessment include: contribution to leadership and management of the firm; client relationship management and cross-selling; approach to risk and claims; adherence to and participation in firm’s policies and processes; and 360 feedback on how the partner lives the values of the firm.

Penny: We’ve also built that into our appraisal system through our ‘partner seven roles’, which carry different weightings by agreement between the appraiser and appraisee, and they might vary from year to year. This system came from our managing partner, who wanted something which would allow people to play to their strengths. If you have a standard competency framework, the assumption is that you’ll be good at everything in that framework, and that puts too big a burden on people, and then they go out with a scattergun approach and think they must do all of these roles.

Jo: I don’t like the term non-billing activities, I think everything relates back to billing and somebody pays for it at some point, and the distinction is really between client-time and firm-time. The challenge is the balance in terms of what people get involved with, you don’t want people to get involved with so many non-fee-earning activities that they don’t have time for their fee-earning. The reality is that the key measurement is the number and value of the hours that you bill, and if you contribute 100 hours in terms of all the other things which makes the firm a great place to work but you’re not hitting your targets, then you won’t get the recognition.

What are the biggest issues in managing associate performance?

Nigel: In talking to a number of law firms at the moment, people are really intrigued by differentiating among the associates, but there is a strong reaction by the partners who are saying that if we differentiate between the same age groups, we’re sending a strong message of “you’re not going to make it”. So the star performers will progress quickly, but the bulk will feel there’s no future for them there and will move on. And partners don’t want to have that sort of conversation, they don’t want to lose people who are pretty good, not stars but pretty good, and they’ll let them develop sometimes, with those people being seven or eight years PQE, and nobody’s ever really had a conversation with them, so there’s a shying away from the whole issue of addressing this.

Jo: There is a lot of angst about should we be differentiating and, if you do, does this demotivate people? But the reality is that’s what life’s like, you’re always making such decisions and selecting some people and not others. One of the most helpful things about taking a performance-based competency approach is that it actually gives people the context to have a conversation about desired and required behaviours.

Penny: I think sometimes the crunch point comes when the individual says, “I would like to be put forward for partnership this year”, and the head of department says “we don’t think you’re ready”. And then there’s the difficult conversation around, “why didn’t you tell me, and why didn’t you do so sooner so that I could do something about it?”

I think you have to be transparent about what you expect the partners to be able to do, and we’ve run senior associate workshops around partnership criteria. If you have these workshops for your senior associates and you explain to them what is required, it’s much clearer to them and they can then go back and have those conversations with the head of department, who finds it perhaps slightly easier to have the conversation about performance because he’s been made to address it rather than being allowed to leave it unprompted.

Jo: We send an email out to all reviewers to remind them to have a conversation about career aspirations, and we signal to the reviewees that they should be expecting to have this conversation. Some people say, well that’s spoon-feeding, but actually it’s changed the culture where people wait for things to happen to them, you do have to direct and support them. I think we need to recognise that, especially in law firms, they are there first and foremost as lawyers and not managers of the business. In law firms I’ve worked at before, there have been some associates who were underperforming and it’s partly been about how they’ve been undermanaged.

Nigel: I’ve seen the damage done to law firm culture around not having that conversation about underperformance, and using remuneration to get that message across. And then they all go down the pub, compare notes, and then gather round that person and support them and say how unfair it is and how badly managed the firm is.

Penny: Underestimate at your peril the peer group pressure from a group of lawyers who develop together and bond very closely. They can get quite agitated if one of their colleagues is being treated in a way they perceive not to be fair.

Charlie: I think a competency-based approach can only work if a robust and transparent performance management process is in place and executed well. It’s worth holding partner roundtables in each practice area to moderate individual appraisals and prevent favouritism or discrimination. Communication and consultation are key, as this change is striking right at the heart of what the lawyers come to work for. The feedback to this change at my firm has been almost universally positive; those who don’t like it have good reason not to!

Penny: I think the biggest conversation you have to have with a lot of associates is that being a lawyer is not enough, you have to be able to do a whole raft of other things on top of it and that’s what’s going to make you a partner, and not just being a technically gifted lawyer. And actually the people at partner level aren’t necessarily the most brilliant lawyers.

Nigel: No they’re not – some of them even have autistic tendencies.

Penny: They’re not even the most intelligent lawyers, but they are the ones who are best at motivating and leading others, as well as in dealing with and managing clients.

Jo: The size of the firm has a big part to play in developing the right skills set in associates. It’s certainly been my experience from having interviewed lawyers who’ve trained in both large firms and medium-sized firms, that those from medium-sized firms have had much greater exposure and responsibility – perhaps not with major clients, but they’ve often managed completion meetings on their own, have been talking to clients and making decisions on their own much earlier.

What do you think is the future of remuneration for law firms?

Charlie: Going forward, I would envisage a more corporate approach where less of a partner’s profit share is awarded as income in the year it is earned but instead held as capital in the firm, with capital growth being allowed to be released say every five years.

I also think we will see a reducing emphasis on base salary and an increasing one on variable pay for associates. The levels of lawyers’ base salaries have been too high for too long. By all means pay a good market rate for doing a good job, but then use variable compensation to reward higher levels of performance. As clients become even more demanding, and margins get more squeezed, this surely has to be the way to go.

Nigel: As we come out of the recession, I think law firms are going to be more selective about partnership requirements and it’s not going to be entirely internally directed. Some UK firms are thinking about the Legal Services Act and about going corporate by getting rid of the partnership or bringing the number of partners down so that there are greater amounts to distribute out.

Jo: Some of us are beginning to have that discussion and thinking about it, and it’s interesting how few partners have picked it up. The October 2011 implementation date for the LSA is getting closer, and the big challenge will be looking at third party investment. They’ll want returns on their investments, and one of the big issues will be around our remuneration system, they’re not going to go for the lockstep.

Penny: There will perhaps be an external remuneration committee, as there will have to be more corporate governance in place. They will look at why an underperforming partner is getting a large bonus, in the same way that a corporate committee would challenge a decision to award share options when the company reported a loss.

Nigel: If you were an external investor, would you allow your investment to be managed by a lawyer? The managing partner is not a professional manager, he is usually a very good lawyer and elected by his partners to leadership because of that, but he may not have had any training in management. If I was an investor, I would want professional management of the business in which I was investing, and not someone who has been managing the firm for three or six years and will then go on to fee-earning or something else. If the law firm goes for a public listing, the whole focus will be on the share price, and that will definitely change remuneration systems.