The legal profession changes slowly (not unlike case law, reliant as it is upon precedent). For example, there has been a shift away from the billable hour over the years, but the billable hour remains the dominant model for charging clients.
And some changes in the legal profession even get reversed. Take the move towards “merit-based” or “performance-based” associate compensation, which a few years ago was all the rage among Biglaw firms. It seems that the momentum in that direction is slowing — or even going the other way.
Earlier this week, one of the most prominent firms using a merit-based system, McDermott Will & Emery, announced changes to its compensation system that keep the performance-based character but appear to make it more lockstep-like. Here’s how one source described it:
On Monday, McDermott Will & Emery announced yet another change to its compensation structure. Essentially, McDermott is returning to a lockstep system. The system tops out lower than the current lockstep system, and the new scale is as follows:
It remains to be seen how this will impact McDermott’s current associate ‘level’ system. Associates were also told that bonuses will continue to be based on prevailing bonus market (essentially the NY market) and individual achievement. The firm does not announce/pay bonus amounts until March, so the impact this has on associate bonuses is unknown at this time.
We reached out to the firm for comment. McDermott shared with us an excerpt from a Q&A that it just shared with its associates (posted in full on the next page). From the memo:
What impact will this change have on bonuses?
The focus of the Firm’s merit-based approach will continue be an Associate’s total compensation for a year (base salary and bonus combined). Based on an Associate’s performance and the market, the Firm will determine the appropriate amount of total compensation for the Associate. At that point, the Associate’s bonus is simply the difference between the Associate’s base salary and the level of total compensation set for the Associate.
Will the Firm continue to pay bonuses based on the New York market?
Yes. The Firm’s philosophy to pay market compensation will not change. Accordingly, in setting bonuses each year, the Firm will continue to follow the New York market….
If I progress more quickly than my class can I still expect a larger bonus?
Yes, if you advance more quickly than your class and essentially jump ahead a class, in assessing comparable market compensation the Firm would look to your “market class” and determine your bonus based on that class and your own performance. If that class is at a higher base salary with a higher bonus, you could expect to receive a higher bonus, again depending on your performance. However, if you don’t keep pace with your class you could also find yourself being moved down a class for purposes of bonus determination.
In a nutshell, it sounds like MWE is sticking with a merit-based approach, but basing it on the traditional Biglaw scale — i.e., the so-called Simpson Thacher scale — instead of McDermott’s “level” system. This strikes me as a good thing, in terms of being simpler and more transparent.
And, according to one MWE source, it’s being received well so far:
Mostly positive reaction from the associates I’ve talked to. [They might] mean a decrease in bonus amounts, although the firm has assured associates that it will still follow NY market for bonus purposes.
It looks like people who had higher salaries than their class year will be grandfathered in until their class year salary catches up to whatever their higher salary was.
So McDermott associates currently earning base salaries above what’s Biglaw standard for their classes are protected against salary cuts. And here is good news for people afraid of taking a hit on base salary due to weak performance:
If I fall behind my class in level advancement, will the Firm lower or freeze my salary?
No, your salary will always be determined by your class.
But here is (potentially) bad news for senior associates above the sixth-year mark:
What happens after my 6th year?
Salaries after an Associate’s 6th year will be set individually. Factors in setting the salary will include the market salary for the Associate’s class, the draw level of our newest Income Partners and the Associate’s individual performance. In no case will the salary level be less than the salary for a 6th year.
In other words, seventh- and eight-year associates aren’t guaranteed the $265,000 and $280,000, respectively, of the Simpson scale. They might get stuck at that $250,000 level — or, if they perform well, they might do better than the Simpson scale. That’s what you get with individually set salaries; as recently discussed, compensation for super-senior associates and for counsel is something of a black box.
It will be very interesting to see what McDermott Will & Emery bonuses look like when they come out later this year.
UPDATE (1/8/2016, 1:13 p.m.): One McDermott source raises this issue:
Under the old system, if you got promoted more quickly than your class, you would get a higher base salary and a higher bonus. They used this fact to hire people laterally from mid-law or in-house with the explanation that spending a year below class allows you to have more time to learn with a lower billing rate, and helps the firm assess where you are on their scale of expectations. In some cases, it really is helpful to the lateral because it allows the firm to hire people who might be great lawyers but haven’t followed the traditional career path. Also, they really have bumped laterals up a year or more in the past.
Under the new system, it seems as if you might get a higher bonus (if you stay all the way until March 15 of the following year), but you don’t get the higher salary. So you might get a higher bonus later, but it is long after the fact, contingent upon staying at the firm, subject to higher withholding (and in most cases, actual) taxes, subject to a minimum (2,000) hours requirement for bonus eligibility, and just generally far less certain because the firm can decide to pay you whatever it wants at that point.