Stepping stone to revolution
Some partners reach the summit of their firm's pay scale having done less work than others.
Anne Mizzi explains how firms are starting to strike a balance between lockstep and a merit-based reward system
Profit distribution systems are undergoing a quiet revolution as UK law firms begin to buy into the thinking behind US firms' 'eat what you kill' systems.
This may not just be because of the US invasion.
The success of UK partnerships with meritocratic pay systems, such as the expansionist SJ Berwin and Gouldens, which consistently manages to pay its trainees more than the magic circle firms, are making their mark.
They must be doing something right, but the Brits have yet to sell out completely.
Many firms still cling to a basic lockstep system, paying their partners according to how long they have been on the partnership ladder, not what they do for the business.
Firms with merit-based pay systems are still generally regarded as aggressive and un-British.
At Gouldens, a partner of several years' standing could be taking home less pay than a junior partner.
This would not happen under lockstep.But the lockstep firms have begun tinkering with their pay systems.
The fine-tuners of the legal world are upgrading with performance-related elements and more subtle refinements such as the possibility of downward movement.Norton Rose, Clyde & Co and Reynolds Porter Chamberlain are just a few of the big City firms to modify their lockstep systems this year, and the halfway house looks set to become the new model for profit distribution systems in the 21st century.The problem with locking partners into a pay ladder, as lockstep does, is that everyone on a certain step is paid the same.
Solicitor Stuart Benson, a consultant at Edge International, says this gives partners no incentive to work.
While some bill furiously to keep profits and turnover up, others can roll into work at ten, put their feet on their desks and take it easy.Mr Benson says arguments of this kind were the main problem with his former firm Turner Kenneth Brown, which collapsed into Dibb Lupton Alsop (now DLA).
'Lockstep was a disaster,' he concludes.
Similarly, Oppenheimers partners' bickering over their performance led to the firm being gobbled up by Denton Hall (now Denton Wilde Sapte) some years ago.Others, like Allen & Overy, managed to overcome such arguments by modifying their lockstep systems to introduce a performance-related element.But concern that some partners might not be pulling their weight is not the only reason firms are ditching strict lockstep and bringing in more flexible pay arrangements.The trouble is that with traditional lockstep partners are rewarded for turning up.
Rowe & Maw partner and partnership law expert Richard Linsell says: 'You rise up the ladder irrespective of performance and irrespective of anything - except being alive.
You just go up.
When you get to the top, plateau or "top share", you stay there until you retire or go.
It's a great strategy as long as everybody's pulling their weight.'Landwell chairman Grard Nicola is unequivocal.
'I am not in favour of lockstep,' he says.
Landwell, the law firm associated with big five accountancy firm PricewaterhouseCoopers, has a merit-based pay system, which also allows it to adapt to local markets - an important factor for a global law firm network.Mr Nicola is happy to have differences between partners.
'We adapt to the country and the quality of the people.
South Africa makes one-tenth of what London makes.
It would be crazy to have the same compensation paid to the person in each country,' he says.But some people hope that UK firms will fail to cotton on to the fact that a badly managed firm with lockstep is likely to bleed partners.
US firm Crowell & Mooring's managing partner, John McLeod, says: 'We don't have lockstep.
I think all the major firms should keep lockstep.
That's going to make it so much easier for us to recruit.'Contrary to the popular myth of the aggressive US firm, not all US practices force their lawyers to eat what they kill.
Top US firms like Cravath Swaine & Moore, Cleary Gottlieb Steen & Hamilton and Davis Polk & Wardwell have lockstep systems, although they are the exception.
However, they are also among those which pay their partners the most, each averaging above $1 million.John Reynolds, managing partner of US firm McDermott Will & Emery's London office, and a former Herbert Smith partner, says he prefers the US way of rewarding partners who work the hardest and bring in the most work.
But he insists it is not just about who bills the most hours - it is actually about cash collections assessed according to points accumulated.'The reality of legal practice is that you have good years and bad years, but you don't go up and down like a yo-yo.
It's a pretty flexible system.
We think it's pretty fair,' says Mr Reynolds.He suggests that the fundamental difference between US and UK firms is in their accounting systems.
UK firms account on an accrual basis, while US firms have cash-based accounting systems.
'UK clients are used to paying 60-90 days after they get the bill because they are not chased.
And it's no use banging your fist on the table and the head of finance insisting, because it just doesn't happen unless the cash is in the bank account.
It focuses your mind on the money.'But even Mr Reynolds, clearly a convert to 'eat what you kill', still sees some benefit in lockstep.
'Somewhere in between would be ideal,' he says.Although the arguments against lockstep are strong, the system still has its fans.
Whether Clifford Chance is regarded as a lockstep devotee or simply an acquisitive law firm is a moot point, but it has certainly demonstrated its commitment to lockstep in bringing in the likes of US firm Rogers & Wells, German firm Pnder Volhard Weber & Axster and more recently Italian practice Grimaldi.
It had to make concessions with the Rogers & Wells partners, and some of the US rainmakers have cut a deal to remain outside the lockstep system for a couple of years, but even they will be brought within the fold in time.
Rogers & Wells also had to convert from accrual to a system of cash accounting.
But the next UK firm to follow suit with a US merger, Titmuss Sainer Dechert, went the other way, and is ditching accrual and lockstep to move into line with its bride, Dechert Price & Rhoads.But it is not just an international issue.
No doubt, Berwin Leighton and Paisners will be looking at how they will structure their profit distribution as their merger talks advance.
And the outcome in the battle between Berwin Leighton's merit-based system and Paisners' modified lockstep is likely to favour the more meritocratic, given the tension endemic in lockstep systems.There is clearly a huge variety between the two basic models, and the patchwork is becoming more colourful in a converging market.
The US/UK mergers so far have seen one dominant culture winning, but more firms have taken the middle road when they have looked at partners' pay as a result of domestic mergers and internal reviews.
But this season, at least, modified lockstep is the new black.
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