There are two ways to justify a seniority-based system: First, the senior partners’ past efforts have contributed to the firm’s current profitability, and second, their greater experience makes them more valuable to the firm now. Both are testable propositions, however, and should not be assumed to be true. Some partners’ past contributions may long ago have ceased to benefit the firm, and the incremental value of extra years may be slight.

Moreover, past contributions and greater experience are two quite distinct rationales. The former is an “equity” claim, with equity ownership having been built up by past contributions, while the latter asserts the greater current worth of a senior partner. The latter, if adequately demonstrated, is more readily acceptable to younger partners. The equity interpretation is harder. In a corporation, equity is built by making contributions to support certain fixed financial assets. In a professional firm, equity contributions primarily mean building up the assets of goodwill, skill, and reputation. In a competitive, transactional marketplace, these assets depreciate rapidly, and claims for “equity returns” are less valid.

Perhaps the greatest benefit of the seniority system is that, by de-emphasizing year-to-year performance, it avoids the whole problem of trying to weigh the various forms of performance. It thus has the virtue of being easy to administer – as we shall see, an important consideration. Its most commonly cited weakness is that, in failing to reward superior professionals, the firm risks losing these productive people. In a competitive environment, in which lateral moves of partners are commonplace and younger professionals are less willing to wait for (increasingly uncertain) future rewards, the danger is particularly acute.

While this may be the most visible problem of the seniority system, it is not the most important. Far more significant, in my experience, is the fact that the system fails to recognize and reward differences in performance among partners of equivalent tenure (at all levels) and thus creates an environment that can be extremely discouraging to a number of partners. “Why,” they ask, “should I strive for outstanding performance, when such efforts are neither rewarded nor even acknowledged?” Such reactions are particularly likely in firms in which, because departures from the seniority system are avoided, poor performance is not confronted.

In the world of professional services, there is a fine line between the good and the excellent. It is, however, upon such distinctions that reputations and profits are built. Once partners stop striving for excellence and settle for competence, the firm has entered a period of inevitable decline.

In spite of the problems of the lockstep system, some of the most prestigious and successful professional firms continue to use it. Such firms assert that by avoiding discussions of partners’ relative contributions, they preserve collegiality and can focus attention externally. on winning and serving clients, rather than internally, on intra firm politics. Instead of financial incentives, these firms depend on such mechanisms as firm culture and “social control” to motivate partners to work at their peak and to accept various roles in promoting the long-run health of the firm. If a partner’s slice of the pie is predetermined, all that remains is an incentive to work to increase the size of the pie, a welcome coincidence of individual and firm interests.

Lockstep systems appear to have survived mostly among firms that have not suffered declines in overall profitability. When there is more than enough to compensate everyone well, there is less pressure to compare and evaluate individuals. Few firms, however, have the twin blessings of a bountiful environment and a homogeneous group of bright workaholics.

Excerpted from ‘Managing the Professional Service Firm’ by David Maister, pages 256 to 258