Slaughter and May is overhauling its associate appraisal system in a move which will usher in merit-linked pay for the firm's more senior lawyers.

The firm is not breaking with associate lockstep, but will have two salary bands available to lawyers from 4.5 years post-qualification experience (PQE) to partner – 'good' (where the majority will sit) and 'exceptional'.

Whether senior associates are branded 'good' or 'exceptional' will depend on their overall score in the new appraisal system, which will see all associates scored across four key areas: legal knowledge and skills; business and communication skills; practice management skills; and people skills and personal development.

The categories are linked with a formal associate development path introduced around a year ago which set out how a lawyer of any given year's PQE should be performing.

A decision on how much more lawyers deemed exceptional will be paid will be made when the firm reviews its associate salaries in April. Junior lawyers will continue to be paid on the firm's standard associate lockstep.

Slaughters is also looking at whether to link potential fee earner bonuses with merit, but this will not be decided until later in the year, with any bonuses to be paid in December.

Executive partner Graham White told Legal Week: "The most important change is the new appraisal system which will now be linked with the associate development path we brought in around one year ago. For more senior lawyers (4.5 years PQE) the result of the appraisal will affect salaries from May, when some outstanding lawyers will be categorised as exceptional and will receive a higher salary. Bonuses for all lawyers could include an element of differentiation in future but that will not be decided until later this year."

"The thinking behind this is that associates wanted more differentiation and we increasingly agreed that it would be fair to be able to better reward those people who are really outstanding. It's important to note that just because an associate is not graded 'exceptional' it doesn't mean they have no prospect of partnership."

The firm stressed that it will not move to an hours or billing targets culture, and lawyers sitting in the 'good' category will still be able to make partner.

Last October Slaughters cut back the bonuses it pays to its fee earners, trainees and staff, with associates receiving a 5% bonus for 2012, down from the 8% paid out last year.

The firm last April dropped its longstanding biannual pay review system moving to an annual review instead.

The magic circle firm's move makes it the latest in a growing list attempting to more closely link pay with performance. Those to have recently moved to more merit-based structures include Freshfields Bruckhaus Deringer and Norton Rose.