The death of lockstep in law firms

Meeting an old friend for a beer recently, our conversation turned to career prospects and how we are rewarded. As I explained the concept of lockstep, my friend, who has spent his career working in industry, became increasingly confused and I felt as if I was trying to explain the laws of cricket to an American. Surely, he asked, I was set objectives and then rewarded and promoted according to how I performed?

My friend would be pleased – as I am – that, across the profession, the approach to equity structures has changed over the past few years. More and more firms have changed (or are changing) from a system based on pure lockstep or modified lockstep to a system with a more significant performance-based element.

When making these changes, there is a balance to be struck between the elements of compensation linked to longer-term performance and future sustainability, and those linked to short-term performance and sustainability. There is also a balance to be struck between a more settled rigid system and a more flexible system.

The starting point for changes to the partners’ compensation system has to be the firm’s overall strategic goals and a consideration of what the firm expects of its partners in terms of their leadership role and individual performance.

The ability to attract and retain the most talented lawyers – including lateral hires at partner level – is one of the keys to continued success. This, coupled with an increasing emphasis on financial performance driven by the financial downturn (which tends to highlight any disparity in performance between partners), continues to place the lockstep system under strain.

Many firms are sticking with a lockstep system because they believe, often mistakenly, that it reflects the firm’s culture. But, it can be problematic in terms of talent retention. Partners are moving firms more than before and are then more aware of what their role is worth and are prepared to jump ship if they don’t feel they are getting what they deserve.

The firm’s culture and values will influence its choice of reward system and vice versa. Traditional lockstep firms believe that performance from their partners is delivered through a system of trust and expectation of future higher rewards further up the lockstep. More entrepreneurial firms harness performance by emphasising internal competition for rewards based on yesterday’s performance.

A determination of the profit allocation should be based on a partner’s contribution to the progress of the firm and not just the attainment of preordained targets. There needs also to be flexibility in any system so that it can adapt to changing circumstances, create a career path and be proactive about succession issues.

In practice, an almost infinite number of variations can be written into an equity structure. Therefore, the key issue is the values and objectives behind it. But, it also has to take account of what others in the market are offering in order to match partner expectations.

I believe that today, in a difficult market, law firm management need as many tools as possible to move the business forward. Compensation should be aligned with the financial and other aims of the firm. The management must be able to use compensation systems, subject to suitable checks and balances, to drive the business by setting the objectives upon which compensation is awarded or not awarded. This will involve regular performance management reviews. This is the way forward.

Lockstep is failing us in a more competitive world. It may still work for small practices, but medium and large firms must continue to move away from this traditional and outdated model.Do I want to be a deputy vice president like my friend? At least he knows where he is in his career and where he can go.

What do you think? Is lockstep dying?