Wilmer Hale cutting lockstep...the times are a changing... Forum

[bahama]

For starters, Wilmer froze salaries. Call it what you want, but that's a pay-cut.

Freeze = making the same as you are now. Cut = making less than you are now. Freeze =/= cut, especially in an environment with basically zero inflation. It sucks to not get a raise you were expecting, but that is not the same as a pay cut which is what happened at a lot of other firms.

This argument about killing lockstep to benefit high value associates (or to shift benefits from lower performing associates to others) is a joke. These moves are being made to reduce the overall amount of compensation, thus increasing PPP. PPP is lagging everywhere, and partners are scrambling to figure out how to maintain the astronomical raises in pay they enjoyed in the previous decade. This "move to merit" happening at the same time as an economic crisis is no mere coincidence.

I didn't say killing lockstep would necessarily benefit high value associates relative to where they are now, rather just that they should be paid more than the lower value associates. A system that pays everyone the same based on tenure is inherently flawed.
Based on the economics you described above, the partners have to either reduce PPP or reduce their associate compensation. Which is the best way to reduce the associate compensation pool:
a) Reduce associate headcount, causing many of the better ones to lateral to avoid lay off risk and also hurting recruiting.
b) Keep lockstep and reduce pay for all associates, causing many of the better ones to flee for more money elsewhere and also hurting recruiting.
c) Do what they are doing and hopefully be able to pay their better associates enough to keep them and still be able to tell recruits they pay $160k.

As their memo to associates explained, they envision that over time performing bonuses will make up a larger percentage of associate compensation. As with other firms that have been making this move, they talk about the numerous and vague considerations that will come into play in determining bonuses.

So now you have associates receiving varying levels of base salary, bonuses fulfilling a large portion of that salary, and greatly increase discretion in allocating bonuses. Wilmer partners have indicated their strong aversion to publishing the distribution of bonuses. Even more telling, you'll see very few (if any) current associates hailing this as good news. These moves away from lock-step have been met with hostility by associates, and viewed as a sign of weakness by insiders and outsiders of the firms.

This is how consulting firms and banks pay their people and it seems to work for them. Aligning pay more closely with economic contribution and moving it away from tenure makes a lot of sense from the stand point of running a business. Change is hard, and no doubt this is being driven by economic concerns. Ultimately, it is the right business decision for a lot of firms and the direction that a large part of the industry will go.

Is merit based pay necessarily bad? No. Are economic circumstances forcing a reduction in average compensation? Quite possibly. But at any rate, these moves away from lock-step have been initiated primarily (if not solely) to reduce associate compenation. Why else would they initiate a policy that has received bad press and caused associates to voice their displeasure at other firms who have initiated similar policies? The vast majority of associates at these firms will be making less than they would under lock-step, especially a few years from now, and VERY few will be making more.

Agreed, but more of the associates might also have jobs under this system where their pay can more accurately reflect the economic value they are bringing to the firm. Firms are under a lot of pressure to reduce hourly rates, there is less work for them to do, and many customers have been taking a harder line about paying for 1st and 2nd year associates. I certainly don’t think these moves will benefit most associates (nor are they designed to), but I do think they are the right business decisions.

[TTT-LS]

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[oneforship]

Some more interesting and compelling points in favor of lockstep:

--LinkRemoved--

[Space_Cowboy]

[Several of] Y'all are crazy. These changes are terrible news for associates in general. While there might be some *theoretical* merit to the changes, that doesn't mean there aren't clear winners (partners) and losers (associates) that result. As others have said, total associate comp will decline, as will average associate comp. This idea that people are confident in their abilities and thus assume they'll be the ones getting the big new merit bumps is ridiculous. Every one thinks they'll be in the top 10% at law school, everyone thinks they're a great driver and poker player, and yet we know that in practice it is not so. The same goes for associate performance, where you are competing against a group of other people who (at top firms) kicked ass in LS just like you did.

A tiny number of firms might engage in the training and personnel development to make these new systems work. But as the blogger at Adam Smith esq. said the other day, most firms will not, thus "exposing them as poseurs."

+1.

[kurama20]

Lockstep for life baby. I swear when I first found out the legal compensation system, I thought it was the best thing I had ever heard of.

[BradyToMoss]

Some more interesting and compelling points in favor of lockstep:

--LinkRemoved--

thought this was the best post Elie's written.

[09042014]

Removing lockstep would be a short sided decision for firms. Sure in this economy they can use it to cut pay, but when the economy turns around their associates are going to try to negotiate for pay increases. PPP depend on associates bringing in much more revenue than their cost to the firm.

Without lockstep the whole industry won't be able to keep its salary fixing structure it depends on.

Who wants to guess what the going rate for a Harvard JD when the economy recovers?

[Space_Cowboy]

Removing lockstep would be a short sided decision for firms. Sure in this economy they can use it to cut pay, but when the economy turns around their associates are going to try to negotiate for pay increases. PPP depend on associates bringing in much more revenue than their cost to the firm.

Without lockstep the whole industry won't be able to keep its salary fixing structure it depends on.

Who wants to guess what the going rate for a Harvard JD when the economy recovers?

So if lockstep remains in place, people aren't going to demand salary raises when things rebound?

[09042014]

Removing lockstep would be a short sided decision for firms. Sure in this economy they can use it to cut pay, but when the economy turns around their associates are going to try to negotiate for pay increases. PPP depend on associates bringing in much more revenue than their cost to the firm.

Without lockstep the whole industry won't be able to keep its salary fixing structure it depends on.

Who wants to guess what the going rate for a Harvard JD when the economy recovers?

So if lockstep remains in place, people aren't going to demand salary raises when things rebound?

Lockstep makes individual negotiation a near impossibility. Salaries will rise but not as fast nor as far as they would under completely market pricing. Some firms will start raising their salary level and other firms will match or lose associates to lateraling.

[Space_Cowboy]

Removing lockstep would be a short sided decision for firms. Sure in this economy they can use it to cut pay, but when the economy turns around their associates are going to try to negotiate for pay increases. PPP depend on associates bringing in much more revenue than their cost to the firm.

Without lockstep the whole industry won't be able to keep its salary fixing structure it depends on.

Who wants to guess what the going rate for a Harvard JD when the economy recovers?

So if lockstep remains in place, people aren't going to demand salary raises when things rebound?

Lockstep makes individual negotiation a near impossibility. Salaries will rise but not as fast nor as far as they would under completely market pricing. Some firms will start raising their salary level and other firms will match or lose associates to lateraling.

(a) The alternative to lockstep is far from "completely market pricing."

(b) Starting salaries in Big Law moved from $100,000 to $160,000 from 2001 to 2007 when lockstep was in place.

[Yimbeezy]

I like lockstep as a way to avoid the pitfalls of asymmetric information and the ruination of collegiality. If you want to dump associates for free riding, lay them off. I am willing to bet that firms that keep lockstep in place will end up outperforming most firms that go to a 'merit-based' system.

[bahama]

I like lockstep as a way to avoid the pitfalls of asymmetric information and the ruination of collegiality. If you want to dump associates for free riding, lay them off. I am willing to bet that firms that keep lockstep in place will end up outperforming most firms that go to a 'merit-based' system.

Unlikely. Other professional svcs firms (banks, consulting firms, accounting firms) don't use lock step. A lot of the "new" compensation models are very similar to what consulting firms do now. And the economy in general has been moving away from lock step style systems (think unionized workplaces) towards more competitive "merit based" compensation for two or three decades.

Laying off the bottom % of performers (which is what lockstep firms have to do) is a lot more ruinous to collegiality than giving different sized bonuses to different people (which firms already do based on hours).

If the law firms that stay on lock step do better it is because they able to get better talent by paying more than the non lockstep firms. They could do even better than this by rewarding their top performers even more and using this to cherry pick the best laterals.

Lock step is a good deal for associates, not a good deal for firms.

[09042014]

Removing lockstep would be a short sided decision for firms. Sure in this economy they can use it to cut pay, but when the economy turns around their associates are going to try to negotiate for pay increases. PPP depend on associates bringing in much more revenue than their cost to the firm.

Without lockstep the whole industry won't be able to keep its salary fixing structure it depends on.

Who wants to guess what the going rate for a Harvard JD when the economy recovers?

So if lockstep remains in place, people aren't going to demand salary raises when things rebound?

Lockstep makes individual negotiation a near impossibility. Salaries will rise but not as fast nor as far as they would under completely market pricing. Some firms will start raising their salary level and other firms will match or lose associates to lateraling.

(a) The alternative to lockstep is far from "completely market pricing."

(b) Starting salaries in Big Law moved from $100,000 to $160,000 from 2001 to 2007 when lockstep was in place.

a) The alternative is basically, we'll decide how much to pay you based on what we think you are worth. That might fly when firms are all doing poorly, but that opens the door to negotiations. If ones firm decides 200K, they'll ask for more or they'll find a firm that will pay 250K. Lockstep facilitates salary fixing among firms. It allows firms to avoid individual negotiation. Without salary fixing, salaries would skyrocket maybe not now, but when a recovery happens. Without lockstep you can't salary fix. Lockstep stays.

b)Compare that do the investment banking bonuses over the same time frame and its a downright reasonable increase.

Lockstep benefits firms most of the time, and only benefits associates during market crashes.

[09042014]

I like lockstep as a way to avoid the pitfalls of asymmetric information and the ruination of collegiality. If you want to dump associates for free riding, lay them off. I am willing to bet that firms that keep lockstep in place will end up outperforming most firms that go to a 'merit-based' system.

Unlikely. Other professional svcs firms (banks, consulting firms, accounting firms) don't use lock step. A lot of the "new" compensation models are very similar to what consulting firms do now. And the economy in general has been moving away from lock step style systems (think unionized workplaces) towards more competitive "merit based" compensation for two or three decades.

Laying off the bottom % of performers (which is what lockstep firms have to do) is a lot more ruinous to collegiality than giving different sized bonuses to different people (which firms already do based on hours).

If the law firms that stay on lock step do better it is because they able to get better talent by paying more than the non lockstep firms. They could do even better than this by rewarding their top performers even more and using this to cherry pick the best laterals.

Lock step is a good deal for associates, not a good deal for firms.

And other firms will try to cherry pick their top performers causing a bidding war over top performers. This would be a salary arms race.

Look at what happened to sports salaries once free agency was introduced. Teams had to compete for talent and salaries skyrocketed.

[Space_Cowboy]

a) The alternative is basically, we'll decide how much to pay you based on what we think you are worth. That might fly when firms are all doing poorly, but that opens the door to negotiations. If ones firm decides 200K, they'll ask for more or they'll find a firm that will pay 250K. Lockstep facilitates salary fixing among firms. It allows firms to avoid individual negotiation. Without salary fixing, salaries would skyrocket maybe not now, but when a recovery happens. Without lockstep you can't salary fix. Lockstep stays.

b)Compare that do the investment banking bonuses over the same time frame and its a downright reasonable increase.

Lockstep benefits firms most of the time, and only benefits associates during market crashes.

a) Oy. For a negotiation to have a chance at success, there needs to be credible threat. With or without lockstep that threat is taking up an offer at another firm. I agree that losing lockstep alters expectations, but I think you overestimate the financial impact it will have.

b) This is dumb. You're comparing apples and ballet dancers. Was it commensurate for the increase in law firm revenue?

[09042014]

a) The alternative is basically, we'll decide how much to pay you based on what we think you are worth. That might fly when firms are all doing poorly, but that opens the door to negotiations. If ones firm decides 200K, they'll ask for more or they'll find a firm that will pay 250K. Lockstep facilitates salary fixing among firms. It allows firms to avoid individual negotiation. Without salary fixing, salaries would skyrocket maybe not now, but when a recovery happens. Without lockstep you can't salary fix. Lockstep stays.

b)Compare that do the investment banking bonuses over the same time frame and its a downright reasonable increase.

Lockstep benefits firms most of the time, and only benefits associates during market crashes.

a) Oy. For a negotiation to have a chance at success, there needs to be credible threat. With or without lockstep that threat is taking up an offer at another firm. I agree that losing lockstep alters expectations, but I think you overestimate the financial impact it will have.

b) This is dumb. You're comparing apples and ballet dancers. Was it commensurate for the increase in law firm revenue?

a) Right now firms in the same market have similar lockstep pay levels. When you lateral in, you get paid the same as everyone at your level in the new firm. The sky is the limit to the new offer without lockstep. It frees the firm to offer more money for laterals.

b)Each associate still brings in a tremendous amount of profit to the firm. The leverage system depends on this. This means there is a lot of money that could be negotiated away if competition increases.

[Space_Cowboy]

a) Right now firms in the same market have similar lockstep pay levels. When you lateral in, you get paid the same as everyone at your level in the new firm. The sky is the limit to the new offer without lockstep. It frees the firm to offer more money for laterals.

b)Each associate still brings in a tremendous amount of profit to the firm. The leverage system depends on this. This means there is a lot of money that could be negotiated away if competition increases.

a) Isn't your whole argument premised on at least one paying higher than the others?

b) Right. It still doesn't address why the boom in finance bonuses has any relevance to law firm compensation.

[dresden doll]

[Several of] Y'all are crazy. These changes are terrible news for associates in general. While there might be some *theoretical* merit to the changes, that doesn't mean there aren't clear winners (partners) and losers (associates) that result. As others have said, total associate comp will decline, as will average associate comp. This idea that people are confident in their abilities and thus assume they'll be the ones getting the big new merit bumps is ridiculous. Every one thinks they'll be in the top 10% at law school, everyone thinks they're a great driver and poker player, and yet we know that in practice it is not so. The same goes for associate performance, where you are competing against a group of other people who (at top firms) kicked ass in LS just like you did.

A tiny number of firms might engage in the training and personnel development to make these new systems work. But as the blogger at Adam Smith esq. said the other day, most firms will not, thus "exposing them as poseurs."

I'm pretty much used to TTT's posts being gospel truth so I'm going with his judgment.

[09042014]

a) Right now firms in the same market have similar lockstep pay levels. When you lateral in, you get paid the same as everyone at your level in the new firm. The sky is the limit to the new offer without lockstep. It frees the firm to offer more money for laterals.

b)Each associate still brings in a tremendous amount of profit to the firm. The leverage system depends on this. This means there is a lot of money that could be negotiated away if competition increases.

a) Isn't your whole argument premised on at least one paying higher than the others?

b) Right. It still doesn't address why the boom in finance bonuses has any relevance to law firm compensation.

a) My argument is that lockstep means they can fix salaries, effectively colluding, and under a merit system they can't. Firms will offer more merit pay or lose associates to firms who won't. A hybrid system could be set up, that could included salary fixing, like rank the associates into top 10%, middle and bottom 30% and have lockstep with some merit.

In lockstep firms compete against firms on a firm level basis. If they want slightly better talent they have to pay everyone more money. So firms are less likely to do it.

b) Finance had merit pay and compensation exploded, while law just grew at a good pace. Finance still has great compensation even when many companies took massive losses.

[Space_Cowboy]

a) Right now firms in the same market have similar lockstep pay levels. When you lateral in, you get paid the same as everyone at your level in the new firm. The sky is the limit to the new offer without lockstep. It frees the firm to offer more money for laterals.

b)Each associate still brings in a tremendous amount of profit to the firm. The leverage system depends on this. This means there is a lot of money that could be negotiated away if competition increases.

a) Isn't your whole argument premised on at least one paying higher than the others?

b) Right. It still doesn't address why the boom in finance bonuses has any relevance to law firm compensation.

a) My argument is that lockstep means they can fix salaries, effectively colluding, and under a merit system they can't. Firms will offer more merit pay or lose associates to firms who won't. A hybrid system could be set up, that could included salary fixing, like rank the associates into top 10%, middle and bottom 30% and have lockstep with some merit.

In lockstep firms compete against firms on a firm level basis. If they want slightly better talent they have to pay everyone more money. So firms are less likely to do it.

b) Finance had merit pay and compensation exploded, while law just grew at a good pace. Finance still has great compensation even when many companies took massive losses.

a) I agree with the bolded. Raising salaries firm-wide will meet with greater resistance than one where a proportion of salaries are jacked. Like I said, I still think you're overestimating the impact.

b) How exactly are you not seeing this? Law firms pay their employees based on what the law firms makes. If profits at law firms increased on the scale we saw in finance, you might have a semblance of a point.

[09042014]

a) Right now firms in the same market have similar lockstep pay levels. When you lateral in, you get paid the same as everyone at your level in the new firm. The sky is the limit to the new offer without lockstep. It frees the firm to offer more money for laterals.

b)Each associate still brings in a tremendous amount of profit to the firm. The leverage system depends on this. This means there is a lot of money that could be negotiated away if competition increases.

a) Isn't your whole argument premised on at least one paying higher than the others?

b) Right. It still doesn't address why the boom in finance bonuses has any relevance to law firm compensation.

a) My argument is that lockstep means they can fix salaries, effectively colluding, and under a merit system they can't. Firms will offer more merit pay or lose associates to firms who won't. A hybrid system could be set up, that could included salary fixing, like rank the associates into top 10%, middle and bottom 30% and have lockstep with some merit.

In lockstep firms compete against firms on a firm level basis. If they want slightly better talent they have to pay everyone more money. So firms are less likely to do it.

b) Finance had merit pay and compensation exploded, while law just grew at a good pace. Finance still has great compensation even when many companies took massive losses.

a) I agree with the bolded. Raising salaries firm-wide will meet with greater resistance than one where a proportion of salaries are jacked. Like I said, I still think you're overestimating the impact.

b) How exactly are you not seeing this? Law firms pay their employees based on what the law firms makes. If profits at law firms increased on the scale we saw in finance, you might have a semblance of a point.

B)But law firms don't pay based on what the law firm makes. They pay based on what they can pay them and still get decent talent.

[Space_Cowboy]

B)But law firms don't pay based on what the law firm makes. They pay based on what they can pay them and still get decent talent.

Jesus dude......

EDIT: To clarify, when I said "makes," I meant what the firm brings in via revenue. Its irrelevant what financial firms pay their people since you don't know whether their growth in revenue was anything comparable to the growth in law firm revenue.

[09042014]

B)But law firms don't pay based on what the law firm makes. They pay based on what they can pay them and still get decent talent.

Jesus dude......

If you want to act like an asshole you can, but firms with the low profitability and high profitability all pay very similar wages for associates. Exactly the same the first year. It is obviously not based on what the firm makes.

Of course there are a few exceptions.

[Space_Cowboy]

B)But law firms don't pay based on what the law firm makes. They pay based on what they can pay them and still get decent talent.

Jesus dude......

If you want to act like an asshole you can, but firms with the low profitability and high profitability all pay very similar wages for associates. Exactly the same the first year. It is obviously not based on what the firm makes.

Of course there are a few exceptions.

Yeah, I acknowledge my word choice was poor. My issue is with the comparison to financial firms. There's no good reason to compare the two since you don't know whether growth in profits was similar in both fields. If law firm profits only grew 60%, but financial firms' grew 1,000,000%, the growth in compensation in finance obviously has more to do with firms in that field being wildly more profitable, not simply that they had a merit system.

[bahama]

a) My argument is that lockstep means they can fix salaries, effectively colluding, and under a merit system they can't. Firms will offer more merit pay or lose associates to firms who won't. A hybrid system could be set up, that could included salary fixing, like rank the associates into top 10%, middle and bottom 30% and have lockstep with some merit.

In lockstep firms compete against firms on a firm level basis. If they want slightly better talent they have to pay everyone more money. So firms are less likely to do it.

b) Finance had merit pay and compensation exploded, while law just grew at a good pace. Finance still has great compensation even when many companies took massive losses.

I don't see how folks think lockstep is either good for law firms (if it was why would hardly any other industry pay this way and why would the law firms be trying to get away from it) or that associate comp would be higher across the board if it ended (although it would be higher for some and less for others).

a) In reality you are going to end up with a system like what exists in other professional services firms, fairly "lockstep" entry level salaries, but variable bonuses and salaries as you get more senior depending on the value you are bringing in. The value of this to firms is you can scale compensation up or down depending on revenue, while in lockstep firms are screwed (and forced to do mass layoffs and across the board salary cuts which drive away top performers) when revenue is down because their costs are mostly fixed. Because compensation is linked to the revenue someone is bringing in, there is a natural limit to how high any bidding war for someone can go, unlike in pro sports where the marginal increase in revenue (add'l ticket sales, advancing to playoffs) by adding a star player is much harder to measure.

b) Finance comp exploded because of massive revenue increases, not merit pay. It stayed high for the people in areas that were still profitable while the people in the areas that lost money (think securitization) got laid off. Law firms didn't, (and won't) have the type of revenue increase finance firms did because they get revenue in a totally different way, that can not grow as fast as it can in finance:

Law Firm Revenue = Hours Billed x Hourly Rate (to grow they have to increase one of these, but beyond a certain point the only way to bill more hours is to increase headcount).

Finance Firm Revenue = % transaction volume (to increase revenue they need to do more transactions or bigger transactions, which doesn't necessarily grow proportionately to headcount.) Also, finance firms can (and did in a big way) borrow money to increase their transaction volume (such as using borrowed money to make bigger trades which they then get a % of). There is really no equivalent to this as a revenue driver for law firms since there isn't really a market to borrow their revenue drivers of hourly rate or hours billed, so the comparison really is like apples & ballet dancers that space cowboy said.