Connections for Success

 

05.29.15

Tips for Effective Performance-Based Compensation
Danielle M. Winkle

If your firm still uses a lockstep model to compensate associates, you may be undermining your profitability and competitiveness. An effectively implemented performance-based system can increase the satisfaction of both clients — who do not want to pay high rates for “baby lawyers” — and associates, many of whom are now more interested in work-life balance than achieving partnership.

Why Lockstep is Lacking

Under a traditional lockstep system, associates are essentially rewarded for their tenure. The longer they stay with the firm, the more they and other attorneys in their “class year” are compensated, and the more clients pay for their services.

With a performance-based system, associates advance within the firm and receive compensation based on a range of factors, such as:

  • Billable hours;
  • Profitability;
  • Client satisfaction,;
  • Business development activities;
  • Professional development;
  • Pro bono work; and
  • Technical skills.

The multifactor approach encourages associates to work strategically rather than simply piling up billable hours. And it helps law firms recognize and reward their highest performers, as well as move toward strategic goals, such as developing new practice areas or cross-selling to existing clients.

Performance-based compensation is not new, but some of its early efforts failed and turned off early adopters. Instead of prompting associates to develop and demonstrate key competencies and specific behaviors related to becoming successful lawyers, earlier systems placed too much emphasis on acquiring technical skills. Technical skills such as strong written and verbal communication, research, and analytical abilities are important, of course. But effective performance-based compensation also recognizes “soft” skills such as autonomy, teamwork, client relations and work ethic.

Defining Good Performance

To begin, your firm must define specific performance levels that mirror the logical steps in an associate’s career and corresponding competencies. It then should assign associates to the various levels based on their contributions. Many firms use a three-level system, with a different salary assigned to each. On top of their base salaries, associates earn bonuses or merit-based compensation awarded only to those who exceed the goals for their respective levels.

Associates should receive a clear explanation of your firm’s expectations and how their contributions help the firm achieve its strategic goals. Allow associates to direct and assess their own development along the way. Not surprisingly, associates need a more individualized and detailed “business plan” than they would under a lockstep compensation model. Plans should include specific goals that align with both the practice group’s and the firm’s objectives, such as acquiring specialized knowledge by taking continuing education classes or attending conferences.

Keys to Success

If you decide to switch to performance-based compensation, be sure to get off on the right foot. To encourage associates to embrace the new arrangement, first ensure that partners fully buy in and communicate their support for the idea. Also distribute clear written guidelines about how the system works and explain why it is superior to a lockstep model.

A fair and consistent system is essential. Evaluations should assess the appropriate competencies to determine associates’ progress toward firm- and client-relevant objectives. Understand that your firm must provide adequate opportunities for associates to work on challenging cases and grow professionally. Zero-sum “games” in which associates are pitted against one another is generally bad for morale. Plus, it can harm the quality of client work. Instead, associate workloads and professional development opportunities should be distributed equitably.

Pay-for-Performance Pays

A well-implemented performance-based compensation system can improve your firm’s profitability, motivate associates and boost client satisfaction. If you are still using a lockstep system of compensating associates, bring up the idea of switching to a performance-based model — and enumerate the benefits — at your next partner meeting. For questions, contact Danielle Winkle at dwinkle@orba.com or call her at 312.670.7444. Visit orba.com to learn more about our Law Firm Group.

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