Thought leader

By Bruce MacEwen, AdamSmithEsq.com, New York City

Bear Stearns melts down. The US Federal Reserve stands behind obligations of an investment bank for the first time since the Great Depression. One after another, credit markets freeze. Structured finance, securitization, private equity M&A, and hedge fund formation stop dead in their tracks. For the first time in a decade, law firm revenues and PEP may actually decline vis-à-vis last year.

What’s a managing partner to do?

If I told you you could potentially (a) allocate your precious salary and benefits dollars more intelligently; (b) steal a march in the ‘war for talent’; and (c) spread some of the pain of what looks to be an inevitable downturn more equitably across the firm – but that you’d have to discard a deeply ingrained custom to do so – would you want to hear more?

If so, may I suggest you jettison the practice of ‘lockstep’ associate compensation.

Tying associate salaries and bonuses to year of graduation is a century-old tradition, almost inconceivable to dislodge. But step back: What other industry conducts itself on comparable terms?

Consider creating (say) three overlapping ‘bands’ of seniority past first or second year, each band with its own minimum, median, and maximum salary range. Spot associates within those bands based on 360° assessments of: their pure analytic and intellectual excellence; their cogency in writing and speaking; their skills at teaming with others – up, down, and sideways; and their ‘emotional intelligence’ vis-à-vis clients. And yes, make it possible for a high-performing fourth year to out-earn a sixth year dangerously close to fouling out of the game.

Why?

Fighting the war for talent is all about distinguishing between who you want and who you don’t. Try putting your money where your mouth is for those you covet and want to retain. In other words, tell people the truth about their perceived value in both word and deed.

Associates’ costs should reflect their value to clients, not miles on the calendar odometer. Congruently, billing rates should rise when lawyerly excellence rises and not by anniversary.

Paying for performance is not only part of any rational profit-maximizing strategy; it has a far more important characteristic: it is fair. Too radical? Afraid competitors and recruits will malignly misinterpret and draw unflattering inferences? Waiting for another firm to take the lead?

Fine. See you at the other end of this downturn.

Bruce MacEwen cam be contacted at: bruce@adamsimthesq.com