Making a merit-based pay model work for your business
With newly qualified lawyers preparing to join their new employers shortly, many law firms are in the process of reviewing their pay bands and pay structures. Once again, the discussion surrounding the benefits and drawbacks of the traditional PQE-based pay model have begun, and the merits of alternative pay models, have been reopened.
The PQE-based model, or lockstep model as it is often known, is widely used across the UK commercial legal landscape, and is designed to link a lawyer’s salary to their number of years Post Qualified Experience (PQE). For example, all NQL’s will be paid the same, all third-year associates will be paid the same, and so on.
Benefits of the PQE-based/lockstep model
A key benefit of this model is the ease of calculation required. Little input is needed when pay reviews are put into place – simply knowing how many years' PQE an individual has is enough to work out what their salary for the coming year will be.
The model also provides a clear process with real transparency, emphasising the importance of sharing and support between the partners, leading to wider opportunities and mitigating an element of risk.
As the lockstep model places emphasis on the success of the group, and the teamwork involved in that success, rather than individual achievements, it creates a supportive culture which encourages lawyers to work in the firm’s best interests rather than their own, on the understanding that they will be rewarded for their loyalty and longevity. This affords greater security for partners, and greater stability for the firm.
As employees know that their pay is a direct reflection of their seniority within the firm, and that their peers and colleagues are paid in line with this, a degree of certainty regarding partner progression is provided.
Drawbacks of the lockstep model
The obvious drawback to the lockstep model is its failure to link reward with individual performance, which some believe encourages inefficiency and an unfair situation whereby lesser performers can coast on the success of others. Equally, the highest performers within the team can end up resentful of a purely lockstep model of pay, as they will be rewarded the same as lower performers within the business despite earning more for the firm, and will feel that they are bearing the brunt of the responsibility.
The model appears dated when compared to the methods of remuneration in other professional services industries. By purely basing a lawyer’s salary on the amount of years they have accumulated post-qualification, rather than other key performance indicators, lawyers are given little incentive to over-achieve their targets which would ultimately improve the overall success of the firm.
Merit-based pay model
Merit-based pay, which can be used either independently to the lockstep model or alongside it, is a performance-based remuneration model. This can either be tied to the performance of the firm, the performance of the individual, or a combination of both.
Usually merit-based pay comes in the form of an annual bonus delivered to the individual depending on their achievements in line with the KPI’s set to them. However, the merit-based pay can also be used for salary progression purposes. Rather than opting for the traditional lockstep model (whereby everyone at the same level of experience is given the same pay increase), larger or smaller salary increases can be given according to an individual’s performance.
Benefits to the merit-based pay model
The most obvious benefit to the merit-based pay model is that individuals are rewarded according to their performance: high-fliers are remunerated accordingly for the success they are contributing to the firm; whilst those who are under-performing are not unfairly benefiting from the hard work of their colleagues. This is particularly relevant for employees who consistently over-achieve year on year when a merit-based salary increase model is used – those who excel will be rewarded for their commitment which will in turn sustain their loyalty to the firm.
Merit-based pay can be used to encourage exceptional performance against company objectives, as it paints a clear picture of how individual effort is directly linked to reward. Therefore, it can be used to motivate individuals to go above and beyond to deliver. If used correctly, this can have a significant impact on the success of the firm.
Drawbacks of the merit-based pay model
Critics of the merit-based pay model consider it counter-productive in encouraging lawyers to take on management roles, which are vital to the growth of the firm but take the individual away from logging more billable hours.
Merit-based pay models can also have an implications of gender bias. Women still disproportionally bear the burden of child-raising and home management, meaning working 12-hour days to over-achieve on billable hours targets is far less achievable.
There is also an element of calculation required with this model, which can be complicated if the correct tools are not utilised to full effect. This is particularly relevant when a combination of bonus and salary increase merit-based pay models are used, as the overall picture can become confusing if not carefully managed.
Which model is best?
The model which is best for an individual firm really depends on the culture it wants to build and the type of people it is trying to attract. Many firms, including our client CMS, are opting for a blend of the two models, allowing for employees to benefit from the progression offered by the lockstep model whilst also rewarding individual performance with a merit-based pay structure.
Striking the balance between the two to ensure the final offering is both fair but also motivational can be difficult but using a data-led strategy with consistent formulas based around standardised KPI's is a good route forward. Whilst this might sound complex, tools such as Mosaic can remove the guesswork and reduce the man hours spent on producing a final pay structure.
If you want to find out more about Mosaic, or how simple merit-based pay calculation can be, call Innecto on 020 3457 0894 or email email@example.com.