Profit-related pay (PRP) is currently one of the most frequently debated subjects in the bars around Chancery Lane and the City where the largest firms have their offices. At least one-third of the top 20 firms are either introducing PRP or are seriously considering it. The smaller firms and the regional firms are also going in the same direction.
This month alone Linklaters & Paines is introducing a PRP scheme for its 1,500 professional and support staff and D J Freeman is bringing in a system of profit centre accounting to provide more information about departmental costs.
Two top ten firms, Simmons & Simmons and Denton Hall Burgin & Warrens, are among those who have already introduced PRP. For both, the tax advantages were at least as important as the issue of staff motivation. The Inland Revenue allows employers to pay up to pounds 4,000 tax-free to each employee under a PRP scheme. For a higher-rate taxpayer this means a tax saving of pounds 1,600. By introducing PRP last year - at a time when salary levels were decreasing by more than 5 per cent across the profession - the firms found a way of helping their staff in the depth of the recession, by giving them more take-home pay from the same earning.
The accountancy firm Arthur Andersen has done the most to promote PRP schemes in law firms since it introduced its own in 1991. David Marks, a tax partner, has advised Denton Hall and others. 'There's a great deal of interest because it enables employees to have a reasonable pay increase when law firms are having trouble with their profitability,' he says.
Many others around the country are likely to follow suit. The firm Halliwell Landau in Manchester, Bristol-based Osborne Clarke and the City firm, Sinclair Roche & Temperley, are all mulling it over. Furthest down the road is Halliwell Landau, which hopes to have a scheme in place within the next few months. Like other PRP schemes, it requires 80 per cent of employees to vote in its favour.
Mark Billings, the partnership secretary at Halliwell Landau, says the discussions have lasted longer than the firm originally expected. 'We have experienced some resistance,' he says. 'Some people are not very happy with it. They are concerned about what would happen if there is a legislative change and PRP is scrapped. They would have agreed to a lower base salary and they would be out of pocket.'
The firm is expected to promise employees that their salaries will be increased for the PRP element if PRP is ever abolished. Employers are not allowed to promise their staff the PRP element of their pay if the predicted profits are not made, but most law firms are trying to set profit target levels for the PRP schemes that are readily achievable.
For Halliwell Landau the tax saving is the main reason for introducing PRP. Sinclair Roche and Osborne Clarke, however, are more interested in the management and motivational issues behind performance-related remuneration. (Performance-related remuneration can be very different to PRP: as its name suggests, it measures overall performance rather than profit, and can be used to differentiate between departments and individual personnel. The PRP schemes treat all employees the same, giving them equal shares of the firm's overall profits.)
The managing partner of Sinclair Roche, Ben Leach, says: 'Most people think PRP would result in a better esprit de corps. It would make staff more motivated, more willing to stay on for the extra ten minutes after work.' Osborne Clarke introduced performance targets for its equity and salaried partners five years ago. Only 60 per cent of a salaried partner's earnings is now fixed. The rest is related to his or her performance in the firm, and that element is set to rise.
'There's an increasing feeling that the employees should also have some risks and some benefits,' says the managing partner, Chris Curling. The firm hopes to introduce some form of profit or performance-related pay by the end of the year.
Law firms have come out of the recession very different animals to the complacent creatures of the late 1980s. Many of the changes are reflected in remuneration issues.
Assistant solicitors are deeply frustrated by the current restrictions that many firms have imposed on partnership promotions. Sally Marsden, a former chair of the Trainee Solicitors Group, suggests that performance- related pay could be used as an alternative way of rewarding them. 'I believe that is a way for firms to retain assistants,' she says. 'There are quite a few disgruntled assistants around.'
Garfield Robbins, recruitment consultants, say that many law firms have, in the past two years, introduced performance-related pay for newly recruited salaried partners. Typically, the new partner would get pounds 70,000 in basic salary plus up to pounds 15,000 depending on performance. According to Gavin Crocker, a consultant: 'Firms now feel that the risks should be shared between the prospective partner and the firm.'
D J Freeman is another practice seriously considering PRP. Its new system of profit centre accounting enables it to analyse in detail the performance of different departments. But Jonathan Lewis, the managing partner, says the system will be used for management purposes only, and not to decide pay levels. 'If we were to relate it to pay it would be divisive,' he says. 'We've built a lot of safeguards in to stop it. In a law firm all the areas of practice are cyclical.'
PRP and performance-related pay have overtaken the quality standard BS 5750 and the debate over corporate management structures as the current issues of the day in running law firms. But Alan Hodgart, a management consultant with Hodgart Temporal, believes that concern over remuneration often masks a deeper worry. He says: 'When I hear firms talking about profit-related pay, I usually find they are not doing enough in the professional area to motivate people.'