UK firms go for US-style bonuses to keep lawyers

Lawyers may claim not to be in it for the money but no-one would suggest that salaries do not matter at all. The astronomical salaries and meritocratic pay systems on offer at US firms have been a persistent lure for high-flying associates and young Turks from UK firms. And with no sign of such temptations disappearing, UK firms are having to look at ways of matching that earning potential if they want to retain their staff.

Many are seeing the “eat what you kill” bonus culture of US firms as the only option. Firms such as Allen & Overy and Clifford Chance already have bonus schemes in place to reward associates who perform exceptionally well and many more firms are now considering introducing them.

Norton Rose is one. Earlier this year it piloted a system of offering performance-based bonuses to its top associates – a system it is now considering extending throughout the firm. However, Patrick Stone, Norton Rose's director of administration, remains cautious.”In my view, performance bonuses are fine, so long as the basis for the award is understood and considered to be fair. Unless this is so, they can be very divisive,” he says.

He adds that measuring performance fairly is very difficult.”It is not like traders, who have a clear, narrowly defined function,” he points out. “Lawyers have a much more rounded profession.”

Edward Andrew, senior consultant with Sheffield International management consultants, believes bonus schemes for associates are a necessity, not just for magic circle firms but for the middle tier as well. Andrew has just finished advising a top City firm on how to set up a bonus scheme that will allow for an additional payment worth up to one-third of the associate's basic salary. He says the two most important elements in any system are transparency and flexibility.

“It can't just be available to rising stars. Anybody who achieves excellence – and not just in relation to fee income – should be eligible for a discretionary-based bonus scheme,” he says. “Otherwise, what incentive is there for people in, say, the tax department when the corporate groups are taking all the money?”

Adrian Fox, a director at recruitment specialist QD Legal, says many leading City firms have relatively flexible systems, but others have concentrated only on areas such as banking and finance, where they are most in danger of losing rainmakers and quality associates.

Many argue that eligibility for a bonus should not just be based on generating fee income but should relate to the overall “ideal” of an associate or partner who contributes to all aspects of the firm, including marketing and research.

The concept of an “ideal” lawyer has been introduced to the pay structure for all equity partners at Edge Ellison which, as The Lawyer revealed last week, has ditched lockstep in favour of incentive-based pay. Performance is assessed not purely on billable hours but will include team development, sales and marketing, and research – all the things that make up a “perfect partner”. Performance is assessed individually, based on how staff have used their abilities.

However, Nick Robbins, a partner at legal recruitment consultants Garfield Robbins, takes another tack: “It all comes down to billings,” he says. “The only way to pay these rates is on billings. It is trying to make firms more of a meritocracy.”

Despite the belief that incentive-based pay will imminently arrive at the door of all the leading City practices, the magic circle firms are all understood to have retained lockstep for the present and the majority of the top 20 also still employ a traditional pay structure. Fox says that many partners like the security of the lockstep system, which allows them to predict their earnings for the coming year.

Some analysts even believe that performance-related pay can actually discourage staff. Such schemes can dishearten those missing out on or not entitled to benefits, but even those who are included can feel a sense of uncertainty about their earnings that can have a negative effect.

Not all US firms work on fixed bonus systems. Fear of too rigid a system acting as a disincentive to staff has led US firm Morgan Lewis & Bockius to reject a fixed or guaranteed bonus system, although it is currently evaluating whether to formalise its system. The firm's managing partner for London, Tom Benz, fears that following the trail blazed by many investment banks, which pay a significant percentage of an employee's salary under bonus schemes, could create an atmosphere of uncertainty.

“Associates who are working hard throughout the year need a guarantee that they will be rewarded,” says Benz, adding that where a huge percentage of salary is paid as a bonus, people often move as soon as it is paid. l see news story, page There is general agreement among UK firms that a flexible pay structure is important. Rainmakers can be retained by paying them at the top end of the bracket – which can be as much as £40,000 more than an average performer – and a bonus-based system keeps costs down for UK firms that cannot afford to pay US rates across the board.

There are three other major factors affecting UK practices. The first is diminishing salary differences at senior levels. Although the difference between the salaries on offer at the top UK firms and their US rivals for newly qualified associates can be as much as £35,000, for a senior associate of four or five years' practising experience, the difference is significantly less.

The second is US lawyers taking jobs with UK firms. When this occurs, the associates usually continue to be paid at US rates, so, while magic circle firms are profitable enough to take advantage of this trend, middle-tier firms face a tougher challenge.

The third is the increasing trend for UK lawyers to leave US firms and come back to UK ones. Fox says: “It is not all one way now. In the past 18 months we have seen UK lawyers at US firms returning to UK firms.”

UK firms often believe that the working culture of US firms should be a sufficient disincentive for lawyers to ignore the potential rewards and stay put, and Fox illustrates a typical argument: “The culture in US firms is not as attractive as that in the UK; you have to bill monumentally – 2,000 chargeable hours a year compared with 1,400 at a UK firm. And US firms will retrench when the recession comes, won't they?”

Fox says the rate of recruitment in US firms is constantly increasing and can only become more significant. It is clear that despite the potential problems of working in US firms, lawyers continue to be attracted by the earning potential of such a move and while magic-circle firms may be able to compete on a salary basis, for middle-tier firms, US-style bonus schemes are now seen as essential.

Although some fear that this will lead to an over-emphasis on chargeable hours, it looks like the US culture is here to stay. The message now is that with lockstep under constant review, there are no sacred cows – change to equity partners' pay structure may be just around the corner.