But We Just Reviewed Our Lockstep Six Months Ago!?

An "evergreen" topic here at "Adam Smith, Esq.," because one despairs to find a durable equilibrium solution for it, is the perennial debate over "eat what you kill" (EWYK) vs. lockstep compensation systems.

Each has its place in the life-cycle of a firm, and firms will want to position themselves at different points on the spectrum—never lose sight of the fact that it is a spectrum—as their internal and external competitive challenges evolve, but it's always a fascinating topic to recur to.

Today we have the results of a Legal Week poll, which they summarize as follows:

"Merit-based pay for partners is sweeping UK law firms, but still struggling to win hearts and minds, according to new research that shows so-called eat-what-you-kill systems of reward are often unpopular with senior lawyers."

Specifically, respondents ranked the desirability of the four alternatives presented in this order:

• "modified lockstep" emphasizing merit:  37%
• pure lockstep:  24%
• "modified lockstep" emphasizing seniority:  20%
• pure EWYK:  19%

More telling, as usual, than the raw statistics are some of the comments.  A Debevoise partner proclaimed himself a "big believer in pure lockstep" since it "gets every partner pulling in the same direction," while an Addleshaw Goddard partner cautioned against a system that is "too merit-based:  You have to make sure the firm still behaves as a partnership and that work is allocated to the right people."

As evidence of the stresses and strains inherent to the territory comes word that Lovells, which just last November rejected proposals for a "bonus pool" above and beyond the lockstep base, is now re-examining that stance following the departure of some high-profile stars including private equity head Marco Compagnoni to Weil-Gotshal in February.   But resistance is keen:

"One partner told Legal Week: "There is not much appetite for it — there is a lot of concern about changing the culture of the firm." Another added: "We have a perfectly fine culture and I hope we can preserve it." "

"Colin Ives, professional practices partner at Smith & Williamson, says that, understandably, choosing a system of remuneration comes down to culture. "If a firm is operating a pure lockstep, is it the right culture for a firm?" he says. "It produces an extremely collegiate team, but can it put the brakes on aggressively expanding into new jurisdictions?""

In other words, if you need to vigorously pound the pavement for new work in a new city, the incentives may be weak for a spear-carrier to lead the charge—knowing that for all his risky efforts he'll receive pretty much what he would have had he kept the home fires burning.   From the same piece, not inconsistently, appears one of the more succinct defenses of lockstep (emphasis supplied):

"Cravath, like Slaughter and May, has a policy of not making lateral hires. This in turn makes it easier for a lockstep to function as all partners enter at the same level, and everyone knows that each partner is in it for the long term.

"In fact, a handful of highly profitable, successful firms have pure locksteps that go against the US ‘eat what you kill’ trend. Cleary Gottlieb Steen & Hamilton, Davis Polk & Wardwell, Wachtell Lipton Rosen & Katz, as well as Cravath, all boast collegiate cultures that they are proud of.

"English firms, however, seem less keen to promote the lockstep as a source of collegiality and equality, and more keen on tinkering with it as a management tool. One of the most recent examples of this is Ashurst, which has moved partners down the lockstep in a bid to raise the performance bar after profits dropped. Like fellow City firm Norton Rose, Ashurst was requested to leave two gateways into the partner-ship; partners who meet performance expectations at various stages can move up through these gateways. Crucially, however, under-performing partners can also move back down through these gateways."

Also back in 2004, Asian Legal Business ran a piece recapping the experience of various US, UK, and home-grown Asian firms in balancing the tensions between lockstep and EWYK.  While not providing any snappy comebacks to the implicit question, "What's best?," they at least pose the right questions: 

"While a single worldwide system offers simplicity, it may also prove to be too rigid. The use of local or salaried partnership status or even a so-called ‘super lockstep’ system may fudge many of these issues, but this can have profound implications for the culture of the firm worldwide.

"While there is much debate over the respective merits of lockstep or a merit-based approach, there is consensus among lawyers over what issues need to be addressed by a firm’s remuneration system. Any system, they say, needs to answer the following: does it motivate your best performers to perform; does it encourage partners to develop existing clients and to locate new ones; does it encourage partners to involve other partners outside their group or office; does it encourage the right behaviour in the firm to partners and all staff; does it enable you to keep partners in areas of significance to the firm which may be inherently less profitable than the rest of the firm; does it facilitate lateral hires; do partners think it fair; and, how much management time does it take to run?"

I would actually condense this (helpful) laundry list to the following:

• Does your compensation system reflect where your firm is in its lifecycle, and what its key strategic challenges are?  And, of surpassing importance:
• Do partners think it fair?

The answer to the second question is one only you and the executive committee can answer.

For the answer to the first, take a look at this, which I am confessedly reprising.  And good luck.