The beauty of merit-based compensation

 In my most recent Advice & Consent column, I called out lazy law professors. When (some) profs slack, I wrote, the students suffer. As you may guess, I’m not a fan of complacency or laziness, nor am I a fan of paying someone a set amount of money — particularly huge amounts of money — simply because it is the status quo.

So, when merit-based associate compensation began popping up at law firms left and right, I was intrigued. After all, those $160,000 yearly salary figures for first-year BigLaw associates were certainly eye-popping.

Back in 2007, when Howrey, LLP became the first firm to ditch lock-step associate compensation, the move was pegged a radical departure from the status quo. In a article, a Howrey managing partner detailed that concerns about client perceptions and justifying the cost of legal services were the impetus behind the firm instituting merit-based compensation. “[T]he idea that compensation levels are arbitrarily set, when those compensation levels in turn result in hourly billing rates, makes no sense from a business standpoint -- no business in this country would run themselves that way,” the article quoted the partner.

Under that explanation, merit-based compensation makes perfect sense. The beauty of merit-based compensation is that it motivates each individual to earn a salary increase by proving his or her worth to the firm. In theory, each individual must work harder (or smarter) to stand out, which in turn results in better overall work product for the client. While merit-based pay may be big news at BigLaw, it’s certainly the norm in the rest of the working world.

But the issue of merit-based associate compensation is neither simple nor one-dimensional. As some writers point out, lock-step associate salaries aren’t all evil. For starters, as many will testify, associates typically work long hours and are expected to be available 24/7 — this is the trade-off usually cited to make a case for high associate salaries: when you’re expected practically to give your entire life and self to a job, you’d better sit securely, knowing that you’ll be well-compensated.

Plus, lock-step salaries provide for some consistency not only within members of the same associate class, but also within associates at different law firms. That kind of consistency is obviously lost with merit-based pay. “Merit-based pay. Oy. We feel for you, associates,” quipped Ashby Jones of the Wall Street Journal’s Law Blog last October. “One of the best things about associate-ship was despite the grueling hours and often mind-numbing work, your paycheck wasn’t a source of stress. Now, it will be. Have fun.” 

In addition, merit-based pay may undoubtedly make for more arbitrary decision-making as to who is granted an increase, and even who is ultimately promoted to partnership status. That may pose problems. After all, any evaluation system is only as fair as the person doing the evaluating.

Merit-based compensation also creates internal competition, resulting in short- and long-term shortcomings, according to an article released by legal consulting firm Hildebrandt. “Experience has shown that a purely billings-based criterion for measuring performance has at least two shortcomings. In the short term, it produces high profits and intense internal competition. Over the long term, it produces less of a firm and more of a group of sole practitioners, whose motivation is their own short term profitability at the expense of building long term skills or building the firm. It also does not help associates create an “owner” mentality because they are rewarded primarily on hours or profits, rather than on a more subjective, total-contribution basis like partners are,” the article notes

For some firms, instituting a merit-based system would be a logistical nightmare. The firm’s associates may work in several practice groups; the firm’s partners may not readily agree on one uniform system of evaluating associates’ work and the partners may in fact have different attitudes towards associate compensation in general. Some associates may work with multiple partners, while others may report only to one, details Erin Geiger Smith in an article in the Business Insider. “And that means evaluating an associate's "merit" would require gathering a lot of information from a lot of people and then trying to find a way to ensure some sort of continuity to those reports. There are always bosses who are tougher or more critical than others, but if you are the associate who works only with the hyper-critical partner, you are necessarily going to be frustrated by your peer down the hall who spends his time working with Mr. Happy Go Lucky and ends up with a better salary because of it.

But internal competition, logistical problems and potential unfairness in evaluations included, doesn’t merit-based compensation still make business sense for most firms and for clients — particularly if it really does make associates work harder and smarter, resulting in higher-quality work product for the client?

Merit-based compensation may have been dubbed a slow-moving trend, but it’s a trend that will continue, simply because it offers law firms a way to deal with the issue of associate compensation without having to impose direct cuts. “Coming after a year when many firms conducted layoffs disguised as performance reviews, trimmed salaries, and hacked bonuses, these new systems appear to be one more way for firms to cut associate pay,” writes Julie Triedman in a recent article in The American Lawyer Going forward, if firms want to cut costs, they can simply promote fewer associates to the next tier -- and nobody will be the wiser.”

By Ursula Furi-Perry, career editor and columnist for The National Jurist