What is (Strict) Lockstep Compensation and How Non-Lockstep Become Today's Preferred Standard Compensation Model
[00:00:00] Can you explain the strict lockstep compensation that firms are getting rid of? And why they're getting rid of it? And what are the major compensation models?
Okay. So lockstep traditionally was used by a lot of big, older firms and older law firms in the United States. It's almost from a different time. It's also used by a lot of the big English firms and so forth. Lockstep means that Partner, the first year makes this much. Makes, maybe, 0.05% of the profit. Let's just make it easy. 1% of the profit. And then, second-year Partner 5th Year, 1.5%, Partner 3rd, and then and up until, 30.
The idea is as you get more senior your compensation increases and in the oldest firms, it did not matter how much business you have. You're compensated as you get older based on lockstep, meaning everything just increases as you get more senior.
A 10th year, partner's gonna make a lot more than a first-year, even if a first-year partner, with $20 million in business and a 30-year partner, zero business, 30 partners still gonna make three times more than the first-year partner, regardless of the business.
This was when law firms were more congenial. People stayed with them through
[00:01:00] their whole careers or to loyalty and all that sort of stuff. And that was just how it worked. And the longer you practice, the more money you can plan to make, and in your compensation, you made a lot more later in your career. Now, as I'm sure you're aware. People could do very well under that. If they, didn't have a business was shared with everyone. That was supposedly a good model. Now the non-lock step, which is pretty much what everyone does.
What happened is in the 1980s starting in the early to mid-1980s, compensation experts and consultants from Anders or whoever consulting companies came in and they said this is crazy. You can't do this anymore. There started a lot of lateral movement partners to new firms. What had happened at that time is we started getting firms in New York opening branch all around the country. In, the 1980's you started getting consultants. There started to be a lot of lateral movement. So firms are opening branch offices New York and LA everyone thought Japan was going to take over the world. I needed to be close on the West Coast.
All this stuff started happening in the mid-1980s and loyalty to firms began decreasing. The [00:02:00] portable business became the main compensation mechanism. The more clients you had, the more you were business, the more you were compensated and that became everyone out for themselves.
That's what nonstop lockstep is. And so the problem that's been happening is, at firms like Baths and Davis Polke and all these other firms, it used to be unthinkable that one of those partners would leave because they were lockstep and as they got more senior, they would get more money. So, even if they were to take clients or didn't have clients, there's no way they would make for Monday a new firm. This is how things worked for a long time. And that's what lockstep compensation was all about. But then, what's happened recently is all those firms were people you'd never think of them leaving. Now they are leaving if they have a business because they can accelerate their careers, make a lot more money working in - firms right now. That's what's happening. A lot of these big New York firms, English firms that are trying to expand realize that they can't grow with non-lockstep compensation so they are moving into what's commonly called the 'You Kill' model. And so that's, how things are working now. Now different types of models. Under a [00:03:00] lot of firms will also have they'll have what are called capital or shareholder partners, and then they'll have income partners and income partners are basically on a salary. Then shareholder partners get a percentage of the business that they bring.
So that's how it works now. It's just something to think about in terms of how things work. And this is the way things work. The larger firms on the lockstep are moving away from it and the main compensation now is non-lockstep, which is 'Eat Wat You Kill'.
Firms will have different ways of distributing profits to the people based on that, some will give them only a percentage of their business. Some will give them a percentage of the whole from different firms, have different models. And it's how this model works that make people either stay or leave.
Typically what'll happen is, someone who's a capital or shareholder partner will feel like they're not getting enough profits or enough money, and someone will be able to learn them to another firm. And that's mainly why people will do that. And one of the things that's nice about this non-lockstep model now is it does make it because it's all about business.
It makes everything wide open. You can suddenly get major clients and so forth and move from a very small [00:04:00] firm to a huge firm. I've seen it happen lots of times once you get business.