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Law firms restructure as economic reality bites

Law firms restructure as economic reality bites

The financial downturn is not only bringing down salaries at top law firms, but also the entire firm structure.

THE financial downturn is not only bringing down salaries at top law firms, but also the entire firm structure. 

A number of high profile firms have in recent weeks announced that they will be changing the way they pay staff within the different levels of the firm. 

As the economy bites, firms are being forced to reconsider business structures. Streamlining is becoming a necessity and combining practice areas is increasingly common. This week Mallesons Stephen Jaques announced it would move its competition and intellectual property groups under the M&A and dispute resolution umbrella, for example. 

But changes have been more radical across the globe, where changes to the partnership structure and salary structure are being overhauled. 

Leverage models have allowed firms to look at moving away from the lockstep model and move towards a merit-based system for associates in which the spread in compensation is more significant, reports The Legal intelligencer. 

Ballard Spahr Andrews & Ingersoll is one such firm moving away from the old model, including that of non-partners. 

The firm’s chairman, Arthur Makadon, said the model the firm uses to pay non-partners is "going out the door" to be replaced with a new system in 2010. The details haven't been finalised yet, but Makadon suggested that the focus would be on merit, not seniority.

"It literally makes no sense to run a business where your basic compensation, no matter how good you are, is the same," he said.

Starting this year Ballard Spahr will also no longer have non equity partners. Makadon has previously stated that there never really was a two partnership tiers at Ballard Spahr because non equity partners had voting rights, contributed capital and didn't have to face another vote before becoming an equity partner. The only difference was that the non equity partners were on a fixed income, which will no longer be the case. Instead all partners will be based on a draw and bonus system, Makadon said.

The New Lawyer reported yesterday that DLA Piper would also be moving towards a new merit-based system of salary, having reduced salaries amongst staff already, by up to US$15,000 (UAD$19,000).  

David Antzis managing partner at Saul Ewing said discussions about salary freezes and changes to leverage models have allowed firms to consider moving towards merit-based structure system for associates in which the division of compensation is more significant.

Antzis said that firms which drop the salaries of associates will need to move towards a merit-based system because they will have to continue to reward their best people in order to keep them.

However, despite all the talk about systemic changes to compensation models, Altman Weil's Jim Cotterman said he wonders what significant difference it will make in the end.  While Cotterman is in full support of a more merit-based system, in which firms increase the dialogue with associates on their progress, he is also cautious that they may just be implementing a different set of performance criteria, not changing the pace with which salaries move up or down.

The lockstep model is like an escalator in that every year an associate advances a step up in compensation because he or she gained a year's experience. The model turns into an elevator, except during recessions, when starting salaries are raised because of inflation and market competition, he said.

At the partner level, the biggest change is stricter adherence to performance criteria and less patience for underperformance. Partners having a down year can no longer get a pat on the back and a chance to improve next year because there are too many partners in that situation for the firm to support them for very long, Cotterman said. While its true the system allows some to cruise along on the back of others, Cotterman said the statistics showed otherwise. 

COMMENT BELOW: Has your firm changed its structure - payment or practice area - to deal with the changing economic climate? 

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