Lockstep vs ‘eat what you kill’: firms’ partnership structures explained

Law firms are traditionally run by partnerships that usually take one of two forms, although there are many variations to both categories. The type of partnership at a firm is one of the important factors that determine the atmosphere in the office, so it is wise to take this into consideration when making applications. Plus, demonstrating some understanding of how a firm is structured can help you impress in an interview.

Even as a trainee at a new firm, what goes on at partner level will have a direct influence on your career, in terms of your progression, salary and the working environment in which you will be spending so much time. Even if your career aspirations centre elsewhere than making partner, you need to consider how your firm or company is structured and what that means for you.

Law in the UK has a reputation as a conservative profession and this is reflected by the widespread use of the traditional ‘lockstep’ partnership model. However, several factors, such as the lasting effects of the 2008 financial crisis creating new pressures for firms (not least greater demand for value from clients), as well as the increasing influence of some US firms which promote a very different kind of culture, have seen more organisations modify or even break entirely from the lockstep approach.

Below we explain the two broad, opposed forms of partnership structure and explore some of the variations that exist within each, with insights from partner level provided by Hanh Nguyen, partner and restructuring and insolvency specialist at Charles Russell Speechlys.

Lockstep

The lockstep model is the most widely used among firms in both the UK and the US. In this system, equity partners’ profit shares increase in line with their seniority within the firm (ie, how long they have worked there). This means that all equity partners who joined the firm in the same year will be paid the same, all seventh-year associates are paid the same and so on, due to automatic annual pay increases. Strictly speaking, the lockstep model applies only to equity partners, but some lockstep firms apply the system to salaried partners and associates too.

Arguments in favour

The lockstep model creates collegiaility, stability and cohesion, as well as loyalty, by placing emphasis on group achievement and teamwork rather than competition between lawyers at the same firm. “A lockstep model provides certainty in terms of partner progression,” explains Hanh. “A partner will know what his or her remuneration will be depending on their seniority at the firm. The pre-established criteria for remuneration also arguably ensures greater transparency and emphasises the sense of sharing and support between partners – and the gains and benefits from diversifying opportunities and spreading risk. In theory, a lockstep model should create a more collegiate culture in which lawyers pursue the firm’s best interests rather than their own, while also rewarding longevity and loyalty, affording greater security to partners.”

Arguments against

The lockstep model fails to link reward with individual performance, which critics believe encourages inefficiency and an unfair situation whereby lesser performers may ‘coast’ on the greater contributions of others. “Firms utilising a traditional lockstep system lack the flexibility to deal with underperforming partners as well as high performing partners irrespective of their seniority,” explains Hanh. “Lockstep assumes that senior partners generate more for the business than junior partners and fails to properly account for the speedy progress of higher performing partners.”

Modified lockstep arrangements – merit-based pay

Many top organisations, including magic circle firms Linklaters and Slaughter and May, have nevertheless continued to utilise a lockstep model, believing that its benefits far outweigh its drawbacks when it comes to a firm’s overall performance and long-term health. However, particularly since the financial crisis of the late 2000s which put increased pressure on commercial lawyers and their clients, some firms have modified their lockstep arrangements to include an element of performance-based remuneration. “Market pressure certainly has an impact,” explains Hanh. “Firms have to pay attention to what their competitors are doing. The increase in competition in London from, for example, US firms which are eager to reward individual performance and has influenced some firms’ approach.”

In many cases firms have a bonus system as an extra form of incentive, although even this may be based on the firm’s overall performance that year, rather than tied to the performance of the individual. Nonetheless, lockstep proponents argue that the reward of achieving partnership is more than enough of an incentive for good performance among the types of people that they employ.

Crucially, whether you are in a lockstep or merit-based system can have a direct effect on your salary and working environment when you qualify as a solicitor. Firms’ reward systems vary, but firms including Addleshaw GoddardAshurstCMS Cameron McKenna Nabarro OlswangFieldfisher,  Pinsent MasonsSimmons & Simmons and Stephenson Harwood have all shifted their remuneration models for associates from a post-qualification experience system to merit-based pay. As Hanh explains: “Arrangements depend on the culture of the firm and the type of people it is trying to attract to the partnership, which will of course also be affected by what competitors are doing. A key benefit of a merit-based system is that it affords greater flexibility to allow partners to move up and down within the reward structure. Such a system enables partners looking to retire from their roles in helping to run the firm to continue to fit within the structure and remain an important part of the firm, rather than being forced out due to the disparity between what they can deliver as fee earners and what they draw. In this way, a merit-based system can create a more elegant yet proportionate structure.”

Although many firms now utilise a form of merit-based reward, this does not illustrate the full extent to which it is possible to depart entirely from lockstep.

Eat what you kill

A visceral term to describe a pay model which is the complete opposite of the traditional lockstep system. Firms with an ‘eat what you kill’ approach base their lawyers’ compensation on the revenue that each individual generates. Often, this entails the use of a formula to account for the firm’s overheads, with partners sharing the costs of running the firm, but then splitting the remaining profits based on performance. In this model, a firm may be more accurately described as a costs-sharing arrangement between individuals rather than a partnership.

Arguments in favour

The ‘eat what you kill’ system certainly rewards high-achieving individuals and keeps them happy, while it may also suit firms that hire a lot of partners laterally, as such partnerships will not have developed organically, with the accompanying working relationships and trust that this entails. It also places all the emphasis on performance, which should in theory ensure that all a firm’s lawyers work hard to pull their weight, thus boosting the financial health of the firm as well its reputation among clients. Not everyone is a team player, so an ‘eat what you kill’ model should get the best out of lawyers who happen to be competitive and individualistic. A purely merit-based model can also benefit a firm’s cashflow, as it incentivises partners to ensure that clients pay up in a timely manner – after all, the partners don’t get paid until they have received a client’s fee.

Arguments against

The system may work to the detriment of a firm’s cohesion and long-term stability. Purely merit-based models have been criticised as too volatile, with a good example being the collapse of Dewey & Leboeuf in 2012, which operated a pure merit-based partner remuneration model. Eat what you kill doesn’t account for essential functions such as referrals between a firm’s lawyers, as there is no incentive to encourage this behaviour, while it also punishes those lawyers who engage in vital work for the development of the firm, such as those who take up management or training roles.

Smaller partnerships – the ‘monarch’ structure

The monarch system is utilised by firms in which one lawyer has clear seniority over all the others and sets the level of remuneration for all other lawyers at that firm each year. This suits smaller partnerships where one lawyer is the original and main generator of business, which can suit the firm’s other lawyers because they earn more under this system than they would if only relying on the work they bring in themselves.

Arguments in favour

The monarch system can work well when the senior lawyer (or monarch) is a reasonable and benevolent leader – good management skills are therefore important. When income is shared fairly and rewards and expectations are made clear, the monarch model can be a viable way of operating for smaller firms.

Arguments against

If one or more of a firm’s junior lawyers develops into a rainmaker in their own right, the model will come under strain. This can lead to departures from the firm, particularly if the original senior lawyer is not willing to share the throne, which may put the long-term profitability of the firm at risk.

Looking ahead: are partnerships giving way to the stock market?

In some quarters, the traditional law firm partnership model is increasingly seen as unsuitable for today’s economic conditions, with listing on the stock market an attractive corporate alternative for large firms.

A handful of firms have already floated on the London Stock Exchange, with regional group Knights among the most prominent to take advantage of the faster growth opportunities provided by opening a firm up to investors such as private equity funds.

Meanwhile, international law firm DWF is considering its own £600 million initial public offering, which if it goes ahead will make it the biggest listed UK firm.

How this affects you: factors to consider before applying

It is obvious that the very different remuneration models utilised by firms should be taken into account when deciding which firms might be a good fit for you personally. “The form of remuneration model can impact on the culture of the firm and therefore the experience of trainees and associates,” explains Hanh. “If candidates want to succeed at a firm and stay there in the long term, they will need to be prepared to embrace the culture because it will determine how they progress. Candidates should consider which culture will meet their career aspirations.”

A firm’s choice of reward structure could also have an impact on the quality of training that trainees receive. “The nature of the particular model could dictate partner behaviour and the work more junior members are going to get,” warns Hanh. “Working as a junior at a firm that rewards a more individual approach may necessitate getting on the right side of the right partners to get the work you want. That must be true to some extent in any firm, but I imagine it is more acute in ‘eat what you kill’ practices. It would probably also impact on performance reviews and therefore qualification and promotion prospects. The hours expectation on juniors is always higher at an ‘eat what you kill’ firm, as the associates are – to a degree – commodities for the partner to drive hard to earn more and get rewarded more. That is not necessarily a negative, but is an example of how the remuneration system will have a direct affect”.

This means that when researching a firm’s training prospects and working culture according to your personal preferences, with a view to making an application for a training contract, looking at its partnership and wider remuneration structure should be one of the first things that you do.

Josh Richman is the senior editor of LawCareers.Net.

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