Some thoughts on building a better law firm compensation system

The biglaw model has gone through quite an upheaval in the past year and a half. Firm dissolutions, mass layoffs (including the previously sacrosant first-years by Latham Watkins), stealth layoffs, salary freezes and finally salary restructuring away from the lockstep model that is proving to be unsustainable for all but the best-managed shops, especially if you try to keep up with the Cravath-Sullivan-et. al. salary scale.

So what's to be done? Some of the latest moves have been away from lockstep compensation of associates and towards performance-based systems. I won't bother with citing specific examples (which are cited and discussed ad nauseum on Abovethelaw), but the attempts to deep-six the lockstep have ranged from merely making bonuses tied to performance to tying associate advancement through three or four tiers of salary levels tied to performance rather than seniority.  The idea, ostensibly, is to promote competition and to reward talent.

On the partner side, compensation systems had more variety before, and I don't think that general picture has changed. Many firms reward their rainmakers with much higher share in profits. At the same time, there are some very prominent examples of firms that are lock-step top to bottom, with partners in the same class getting the same salary, irrespective of how many clients they bring, irrespective of practice area and irrespective even of where in the world they are located.

So which is better? One the one hand, lock-step compensation undoubtedly fosters a more transparent and cooperative work-environment, where associates are not trying to dig each other's grave, hoard work or to otherwise screw peers, and where partners do not wage turf wars on a constant basis (e.g., which litigation specialist gets the next referral from M&A or who gets that superstar associate under their wing) or reward those who have the brownest noses.  On the other hand, partners in such places lack incentive to bring new business, and associates - especially those who don't plan to stick around forever and are therefore not particularly motivated by the partnership carrot - have no motivation to try harder.

I have a solution to propose, aiming to combine the virtues of both approaches:
1. Separate firms into fairly independent groups by practice area, with sizes generally of 5-7 partners and 15-20 associates. Cap leverage ratio at, say, 4.
2. Lock-step salaries of associates across the board, and lock-step bonuses by practice group.
3. Distribute a percentage of partners profits across the board (e.g., 50%) in lock-step by seniority and the remainer ("Profit Remainder") based on the relative contribution of practice groups to the overall bottom line (adjusted for the group's size). Within a practice group, this remainder would be distributed among the group's partners by seniority.
4. Encourage cross-practice group referrals by additionally allocating 5-10% of the revenues generated through referral to the practice group where the referral originates. This would factor in the calculation of the Profit Remainder.
5. Money-losing practices get zero bonuses for associates and zero Profit Remainder for Partners.

6. Recruit law students on a firm-wide basis, and initially assing associates based on expressed preference after the summer program. Associates would be asked to express 1st, 2nd and 3rd preference. In allocation, observe the caps to leverage ratio for each practice group. Associates are initially allocated to their first preferred group, but if too many want to get into the same practice group, they would be allocated by lottery, with those who don't get in then assigned to their 2nd preferred group.
7. Mandate  rotations after a 1-1.5 years to another practice group. Allocation is done as in step 5.  After completing rotation, associates can come back to original group or stay in the second group, based solely on their choice. If their choice pushes the leverage ratio of any one group above the limit, that group gets fewer rookies.
8. Practice groups can recruit associates laterally at their discretion, so long as leverage ratio caps are observed.

The core idea in the above is that collaboration and transparency is preserved within each practice, but competition is fostered among different practices.