Eliminate Lock-Step Model and Reward Performance, Not Time Served

Beginning at the end of 1999, law firms began accelerating the rate at which they increased associate compensation. This trend literally moved at “Internet speed:” within three months, associates nationwide were deemed to be worth substantially more than they had been when hired, sometimes only a few months earlier.

All of this began, of course, when one firm in California declared war in the ongoing salary derby by taking the bold move of increasing first-year associate base pay to $125,000, with a commitment to a substantial bonus beyond the base. Not to be left behind, other California firms quickly followed suit. These increases, which easily topped 20 percent of compensation, were viewed as necessary evils to keep associates from quitting the law firm to pursue dreams of dot-com wealth in new roles at start-up companies or investment banks. A few firms also noted that the increases seemed appropriate since associates were helping increase firm profitability at a time when the industry was booming.

Within a short period of time, firms around the country reacted to the increases in California. Firms in New York City pushed their first-year associate salaries to $125,000 almost overnight. Out-of-state firms with offices in New York did the same. Within weeks, leading firms in just about every large city in the country implemented significant salary increases. Firms in secondary and smaller cities also joined the fray, though it took a little longer for them to move. All the while, associates sat back and watched as their salaries increased 20 percent to 40 percent.

Of course, raising first-year compensation is not the end of the game, as doing so would effectively compress the entire associate compensation structure (to the great displeasure of more senior associates!) To resolve this problem, firms simultaneously ratcheted up the compensation of second-year and more senior associates. Unfortunately, by increasing senior associate compensation, some firms pushed that compensation up to (or above) compensation earned by some partners.