New pay structures—what’s possible for law firms?

33186296 - wage gap concept with blue figure symbolizing men and red pawn womenThe traditional pay structure in law firms can be inflexible, but what alternatives are available and would they be practical for law firms?

The legal profession has never been keen on change, and the traditional employee remuneration model remains much the same as it has for decades—largely based on the hourly rates, billable income and lockstep pay rise model. As Tony Williams, principal at Jomati Consultants, says: ‘It’s always been about salary and bonuses: some linked to individual performance, some on firm performance as a whole.’

The problem with the traditional pay structure is its inherent inflexibility. However, as Janvi Patel, co-founder of Halebury, says, there are ways to play around the edges, for instance, rewarding non-fee earning activity, but in essence it remains the standard pay/reward ratio.

New business models

But with new business models comes an ideal opportunity for change. Patel comments: ‘Alternative legal services providers (or “NewLaw” firms) are proof that it is possible to shake up the pay structure in law firms at all ends of the market—from senior fee-earners at firms such as Halebury, to those doing more volume or routine work via legal process outsourcing models. These new pay structures often involve rethinking the traditional pricing model, looking at what motivates team members as well as what grows the business and how you incentivise that.’

What seems to work, she observes, especially with those companies which fall into the emerging sector of the sharing economy, is streamlining the pricing and reward model. She explains: ‘You essentially receive a percentage of what you generate and bring to the table. This seems to incentivise and reward those who work hard but it also helps play to an individual’s strength, for example, those who are more actively engaged in business development and marketing.’

Patel cites anecdotal feedback the firm has come across while recruiting for Halebury which suggests more and more lawyers are looking for transparency on what they have to do to receive the salary or profit level they want to achieve—but they also want remuneration targets that are realistic to achieve.

Legal application?

Could this work in a law firm? She believes that changing pay structures within a traditional law firm, especially within BigLaw, would be a challenge given the financial complexities of a standard partnership structure, particularly those which operate a lockstep model. However, says Patel, ‘it is absolutely possible to implement alternative pay and remuneration structures within NewLaw firms as we have done at Halebury’.

Moreover, there are many benefits to changing law firm pay structures, including creating a more transparent platform; and rewarding according to skill set and engaging fee-earners more, so they can see the benefit their efforts bring to them personally, and the wider business. Patel adds: ‘I strongly believe that the pay structure and value proposition within traditional law is a fundamental reason as to why there is so much gender inequality within senior positions within law firms. A reliance on the billable hour in the pay and promotion structure of most law firms is a barrier to senior women looking to combine a career with raising a family.’

Patel is positive about the ability of NewLaw firms to implement a modern approach to pay and reward ‘because they are launching from what is practically a blank canvas’. The challenge for BigLaw (as with any large, long-established organisation) is its ability to make fundamental changes. She explains: ‘Changing an IT system is hard and laborious. Imagine changing a partner’s pay and remuneration structure—something they have bought into and worked so hard to achieve. The pay structure as well as the reward structure is a big challenge for law firms. It is something that is being discussed at great length, because there are really no easy answers.’

Williams says: ‘Unlike corporates, law firms don’t have share options. I’m not seeing people coming up with long term incentive plans. Traditionally, the model was “keep your nose clean, you’ll get partnership and that’s your reward”. I don’t think that works any longer. The law tends to be reasonably well paid, and in the City where you have greater competition—particularly competition from US firms—there has been a move to pay benchmark salaries (you only have to look at RollOnFriday which lists every firm’s salaries), and a move to make sure there are bonuses out there as a reward and as a retention tool.’

Can the profession learn anything from the US?

Williams says some of the US firms have schemes if they have investment funds—they allocate some of that to their associates as well as a long-term bonus scheme, but he’s not aware of any UK firms that are doing that.

‘Just before the dotcom crash’, he says, ‘we went through a phase of firms taking equity from clients in lieu of fees, but that all died following the crash. I haven’t seen any sign of that coming back in the UK yet. There are only a handful of firms in the States where they have co-invested alongside their clients. It’s predominantly the partners doing it but some do make part of those investments available as a pot for associates to participate in too. I know of one or two firms that do that, but it is pretty rare even in the States. Most of what the US firms do is pay you very well, and if they have had a good year and you have done a lot of hours you get a big bonus. That’s still the cultural norm: decent salary plus credible bonuses and, in most cases, those bonuses linked to personal performance and firm performance.’

On the related issue of benefits, Williams points to the very broad range of benefit schemes, including pension contributions (normally into a defined contribution scheme), private health, life insurance, some offering concierge type services (‘so you don’t have an excuse to leave the office!’), season ticket loans, and so on. He says: ‘The larger firms have a comprehensive pack of benefits. A few have allowed people to do a salary sacrifice scheme and to buy extra annual leave.’

Could share schemes or long-term bonuses work in a law firm? Williams thinks it could. ‘The problem is,’ he adds, ‘most firms are partnerships not listed currency so there is no valuation mechanism or liquidity. If you have a listed company, you can see how well the business is going by looking at the share price. I don’t know whether you could develop a long-term bonus plan based on how the firm does over, say, a five-year period. The easiest way to do that is to be linked to a share price, if you don’t have a share price, you might use metrics based on revenue, profitability, margin etc and some benchmarking against peer firms. That might be quite a challenge.’

Interviewed by Nicola Laver. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Filed Under: Practice of Law

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