Fealty to Anachronisms

Behold a thunderclap of common sense. Might our industry be about to introduce the camel's nose of "merit-based pay" into the tent?

Washington-based Howrey (630 lawyers) just announced, as reported on law.com, that they are ditching lockstep compensation for associates effective in January 2008. Although the report is a bit sketchy on details, the key elements of the initiative appear to be:

• Starting first-years at "market rate" (Howrey's at $160,000 now).
• After first year, instituting a series of "levels" through which associates would advance based not on seniority but rather on personal evaluations of performance and experience. Subjective? Sounds like. (I prefer to think of it as judgment.) A better approximation of reality than lockstep? Without a doubt.
• Each level would contain a salary range approximately centered on "market," but with some associates paid more and others less.
• According to Henry Bunsow, managing partner of northern California for Howrey, "The goal is not to have associates make less than their counterparts at other firms." He adds, showing a fine appreciation of marketplace dynamics: "If poor performers can get a better deal somewhere else, that may be a marketplace reality -- we would hope that this system wouldn't promote that."

And the firm appears committed to the initiative. For example, one express result of the "performance/experience" evaluative criteria is that partnership tracks could well become shorter for some and longer for others.

Also, each associate will be assigned to partners responsible for their development, exposure to appropriate new responsibilities in areas such as writing, discovery, trial preparation, and client presentation skills, and of course the evaluations, and one full-time staff person will be responsible for monitoring the program and keeping tabs on associates' perceptions.

Finally, billing rates for each associate will reflect their performance/experience ratings, with higher performers billed out at higher rates.

All in all, this reaction probably sums up the reception the non-lockstep plan is getting: "To say it's a bold move would be an understatement," said William Nason, a recruiter with San Diego-based Watanabe Nason Schwartz & Lippman. Matthew Larrabee, chair of Heller Ehrman, is also quoted as taking a cautious approach, allowing as how even though firms may begin to get more creative with associate compensation, "it can be difficult to buck the market trend of lockstep."

But how difficult might it really be? For every perverse situation where an underperformer can arbitrage the system and get a raise by going to a market/lockstep firm, one can hope there will be more situations where high performers could reverse-arbitrage the system and get a raise by going to Howrey. And, if you add in the expected half-life of those two hypothetical lateral associates at each of their new firms, it's perfectly reasonable to expect the dud will be out long before the ace. Over time, associates might begin to sort themselves out by a performance yardstick. Could this be the start of—imagine!—compensation actually having at least some marginal relation to competence?

That appears to be precisely what some reacting to the news seem to be afraid of. Consider this comment on the story, from over at the WSJ Law Blog, as follows:

"Firms paying associates based on merits is all fine and well. The question gets more complicated, however, from a client’s perspective. Presumably, the associate who is paid less will have a lower billable rate than one who is paid more. If this is the case, although the nickel-and-dime client might be pleased, the more serious client will naturally ask: Why am I getting the bottom-feeder associate? Thus, staffing cases will become an issue down the road."

Wait just a minute: Since when should clients pay the same for the dud as for the ace? Yet that's just what this interlocutor seems to recommend.

Furthermore, there's a hairball of confusion in pitting "the nickel-and-dime client" against "the more serious client." Putting aside the implication that clients who want to squeeze their law firms don't have ample opportunity to do so under the current system, why should one assume the "more serious" client would tolerate "the bottom-feeder?" Presumably, this client is "more serious" because there's more at stake. Unless the law firm seriously misapprehends how the client perceives the gravity of their matter (which of course is another topic entirely), the last thing the firm would want to do would be to staff the matter with sub-par performers.

Here's what it boils down to for my money:

• Howrey's initiative is one of the first serious stabs to get away from the transparent fiction that all X-year associates are alike.
• As Bunsow puts it, "no business in this country would run themselves that way." (If I have a chance to interview him, I plan to ask if he's implying that other law firms are not businesslike. On second thought,...)
• This is one of the more meaningful attempts to tie cost of service to value to client: The more skilled the associate (at level X), the more you pay—and the more the associate is actually capable of doing. And finally, Bunsow sums it up best:
• "Our goal is to [1] attract and keep the best people, to [2] compensate them for what they're worth and to [3] justify their cost to the clients, because we think clients are willing to pay for high-quality legal services."

[1] is all about winning the war for talent, by putting your firm's money where its mouth is.

[2] means you understand your associates are not fungible—an extraordinary leap of faith for some, no doubt—and, again, are prepared to act on that reality.

Finally, [3] means you are unapologetic about what it costs to deliver impeccable quality.

The only thing that shocks me about this thunderbolt is how immediate, and visceral, was the resistance. Are we truly such slaves to a century-old system, the "Cravath system," showing greater signs of superannuation with each passing year?

Update 7:00 pm, 29 June:

Henry Bunsow was courteous enough to phone, in response to an email from me, and I learned these additional nuggets:

• The initiative, "as all things new in law firms," he drily editorialized, was prompted by clients. In one particularly telling anecdote, a GC called to ask why the billing rate of a particular associate had jumped in one month by $25 for the same work on the same matter. "Uh, because he passed an anniversary at the firm," Bunsow observed, seemed a lame response.
• Howrey is not doing this in some sub silentio or backhanded attempt to cut associate compensation expenditures overall; to the contrary, Bunsow firmly anticipates the firm will spend more, not less, on associates, as they endeavor more aggressively to keep the high-performers.
• To the question of whether other firms will follow Howrey's suit, I'm sure his answer would be: If and only if clients insist.

I, for one, will be watching this very closely.