Merit-based pay growing in popularity as firms look to reward star performers. Gerard Starkey reports

Half of the UK's leading law firms have either changed their partner remuneration structure since the onset of the credit crunch or are currently reviewing it, according to Legal Week's latest Big Question survey, which highlights the increasing acceptance of merit-linked pay for partners.

Forty percent of partners responding to the survey said their firm had changed its remuneration model for partners since the onset of the financial crisis, with a further 11% in the process of looking at it and an additional 1% saying they had plans to review it. About 41% had made no changes, while 6% said they had reviewed their partner reward system but decided against an overhaul. 

The findings show that only 10% of respondents work in firms with pure lockstep structures, compared with 27% in firms with pure merit systems and 23% in firms keeping aside part of their profits for rewarding top earners. The largest group – 40% – said their firms operate modified locksteps allowing partners to be moved up or down or held based on their individual performance. 

Commenting on the disparities in models, Slaughter and May senior partner Chris Saul (pictured, right) said: "The tremendous strength of the traditional lockstep is that it emphasises the team – partners stand shoulder to shoulder for the success of the enterprise. 

"The modified and merit-based structures appeal more to 'animal instincts' and may thus drive the performance of some, but can be demotivating for a material number of the team who make an important contribution but witness others being additionally rewarded." 

However, Slaughters' stance is increasingly at odds with its peers, with two-thirds of law firm partners arguing lockstep either is 'not ideal' or 'does not work at all' in today's legal market. Only 14% believe it works very well. 

That is reinforced by the fact that 90% of partners think firms should shift their pay models towards more merit-based systems. Almost one in five (17%) said firms needed to change 'completely' as pure lockstep does not work, with 41% arguing they needed to change 'considerably'. A further third said there should be some moves in the direction of merit-based pay. 

Commenting on the trend for firms evaluating their partner pay models, Addleshaw Goddard professional practice partner Aster Crawshaw (pictured, right) said: "When there is less cash to go around, it is even more important that you allocate that cash to the best advantage of the business as a whole. That means looking at both partner performance management and profit-sharing structures. Firms are increasingly looking at ways to build flexibility into their systems; for example, by making it easier and more acceptable culturally to move partners up and down the lockstep, or by adopting bonus pools."

With increasing numbers of firms looking at introducing bonus-pool style structures enabling them to better reward top performers, 69% of those taking part in the survey said their firm now hived off a proportion of profits for merit-based pay for top partners, with a further 6% stating they were considering it. 

Philip Rodney, chairman of Burness Paull & Williamsons (pictured, below), commented: "The primary reason for changes to pay structures is to give firms more flexibility when remunerating the best-performing partners – for instance, the introduction of a bonus pool is becoming more prevalent. There's still a place for the lockstep model – it depends on the type of behaviours and cultures the business is looking to promote."

When asked about their own firm's partnership model, nearly half (44%) said they thought it could be improved or was in need of a structural overhaul, with only one in five convinced it worked very well. 

Despite this dissatisfaction, there was some reluctance towards UK firms shifting towards US-style eat-what-you-kill models. Only 1% said the US model was superior to the UK structure, with a further 

11% claiming most firms could benefit from it. Forty-five percent said UK firms would not benefit. 

DWF managing partner Andrew Leaitherland commented: "Meritocratic systems seem to work better in firms like ours, which are fast growing and still building a brand and platform. We aren't established yet to the extent we want to be and so it is important for us to be able to attract and retain the stars, by rewarding them for the exceptional contribution they put in. 

"The trick of course is to make sure that the allocation of the reward adequately reflects the contribution made by the individual – while you don't want a 100-page manual that sets out every aspect of the profit share allocation, you do want enough guidance to enable your partners to understand what is expected of them to be able to progress." 

Saul agreed, adding: "Those firms looking to drive quickly into new practice areas or geographies will use non-lockstep packages to attract big hitters while, on the other side of the equation, some firms will use remuneration as a defensive mechanism to keep hold of their prized assets."

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