Lockstep vs merit based pay structures

Before modifying its lockstep pay structure a few years ago, staff at Lovells enjoyed near uniform annual increases in their salary linked to PQE. Now that Lovells is possibly gearing up for a merger with Hogan & Hartson, the issue of merit based pay in lieu of lockstep has been brought into the spotlight again.

So, what exactly are the pros and cons of adopting such a system and what does it mean for all of the parties involved?

For hiring managers within firms, lockstep offers a lack of flexibility because they will need to react to changes in the economic climate. Hiring managers operating within a lockstep system will only be able to reduce their wage bill by cutting bonuses which is hardly the best way to reward top performers even in a recession. Whilst some firms have frozen their lockstep to adapt in the current economic climate, it is widely regarded as quite a drastic step to take.

Attraction and retention of associates also becomes a more difficult proposition under lockstep

Attraction and retention of associates also becomes a more difficult proposition under lockstep – if one firm has higher lockstep bands then it will find it easier to attract and retain staff at the expense of a higher wage bill. Conversely a firm with lower lockstep bands will enjoy a lower annual wage bill to the detriment of its ability to attract and retain the very best associates. Changing the lockstep bands within a firm will either meet with resistance from associates if it’s downgraded or from partners if it’s upgraded.

However, a lockstep system does draw less on management’s time because one would expect that the appraisal and salary review process is less complex than that of a merit based system where a number of factors over and above job performance might need consideration – firm citizenship and commitment to CSR for example.

Employees in a lockstep pay system are likely to feel that they have a greater level of security in their annual pay – it’s usually a transparent system internally where staff are guaranteed, subject to recessions creating freezes, regular pay rises. The lockstep system, transparent as it mostly is, also makes it incredibly challenging for firms to pay more to men than to women, as can be the case in other industry sectors.

But does lockstep restrict the pace of remuneration growth of those employees who are able to generate or output a greater proportion of high quality profitable work than his or her peers? Or should bonuses and merit based systems reward associates for the business they are actually able to generate for their firm? In making decisions around lockstep versus merit based pay, partners need to decide how best to reward their exceptional associates.

Either way, there will continue to be firms that stick rigidly to lockstep whilst others push the boundaries by exploring other options. If firms are serious about improving their attraction and retention rates in the face of the current recession, they should be seriously considering the mix of merit and bonus related pay versus any lockstep element they have in their pay structures.

Any changes to pay structures that senior management decide to implement will inevitably meet with some resistance from employees and may prove to be a challenge. It is therefore crucial that senior management are totally bought into any proposed change and are able to communicate it enthusiastically, clearly demonstrating the benefits to all staff. Undoubtedly hiring managers will need to be trained in how to evaluate staff in light of the implementation of a merit based pay system. Whilst merit based pay structures are designed to reward top performers, it will also be important not to forget to train managers in how to help underperformers to improve.