Friday, January 30, 2009

Chill of Salary Freezes Reaches Top Law Firms

LARGE law firms have long been known for lock-step salary increases and annual bonuses. But the recession and other economic pressures are changing that, with many firms deciding to freeze salaries and rethink bonuses.

In mid-December, the legal profession was taken aback when Latham & Watkins, considered a market leader, announced that it would keep 2009 associate salaries at their 2008 levels. At least 20 large firms nationwide have since done the same.

Although many associates are angry about the freezes, others are relieved, said David Lat, founding editor of, a blog about law firms and the profession.

“There is this sense that firms didn’t act prudently during the boom and now they are getting religion, and that it’s better late than never,” Mr. Lat said. “Many associates we have spoken to think the freeze probably saved jobs.”

For decades, when top-tier firms raised starting salaries, other firms would follow suit, in order to compete for the best talent.

“Lawyers are very conservative and tradition-bound,” Mr. Lat said. “There is a certain security in knowing what you are doing now is what others are doing and what has been done in the past. With salary freezes, you are seeing a sort of reverse ratcheting. If one firm sees a competitor lowering salaries, they feel it’s safe to lower salaries, too.”

Salaries of associates, as opposed to non-equity partners, appear to have been the most affected by freezes. (The pay of equity partners is closely tied to a firm’s profitability.)

Law is one of the few professions in which a 25-year-old with little experience can make a six-figure salary. Top law firms generally pay their new associates $140,000 to $160,000 a year.

Of course, not every lawyer’s starting salary is that high. According to the National Association for Law Placement, 16 percent of the class of 2007 law school graduates employed full time make $160,000 or more, while 38 percent make $55,000 or less.

Top-tier firms have been watching one another’s compensation moves since 1968, when the New York firm Cravath, Swaine & Moore raised first-year salaries to $15,000, well above what any other firm was paying at the time, said William D. Henderson, an associate professor at the Michael Maurer School of Law at Indiana University, who studies the legal labor market. “It was a watershed moment for the industry, akin to a shot heard round the world,” he said.

Starting salaries rose gradually through the 1990s, and in 2000, those at top firms jumped to $125,000, according to the association. Firms that did not meet that increase were perceived as second-rate, Professor Henderson said. “But today the thinking is, ‘If we meet the market, it may threaten our franchise.’ It’s too dangerous now,” he said.

Although the recent spate of salary freezes is a response to the recession, law firms have been facing other economic issues. For several years, corporate clients have complained about high billing rates, especially for relatively inexperienced junior lawyers.

In 2008, revenue and profits fell at many firms, and some managing partners at those firms are now rethinking their business model, Professor Henderson said.

Guy Halgren, chairman of Sheppard Mullin Richter & Hampton, which announced a salary freeze earlier this month, said the firm had been moving for the last few years toward a more merit-based advancement system. .

“We already do some of that — part of our bonus system is merit-based and it’s been like that for many years,” he said. “This has been happening in the profession slowly, but I think it will accelerate in the next year or two. We’ve been thinking about going to more merit-based incentives.”

This month, Morgan, Lewis & Bockius sent a memo to its associates announcing that 2009 bonuses would be merit-based, rather than hours-based.

Ralph Baxter, chairman of Orrick, Herrington & Sutcliffe, which announced salary freezes in late December, said his firm began reassessing its business model long before the economic crisis. In the last two years, the focus has been on operating more efficiently and at a lower cost to clients. Last year, Orrick announced that in addition to having partner-track associates, it would add substantial numbers of lawyers not working toward partnership, and a significant number of staff members who are not lawyers at all.

“This was born of our focus on adapting to a changed world, one in which our clients are facing greater and greater pressure to control their costs,” Mr. Baxter said.

The criteria for promotion toward partnership is not based just on hours billed, he said. “The criteria have changed over time,” he said. “Today you need a greater capacity to build personal relationships and far more entrepreneurial skill.”

MR. LAT says the focus on efficiency and cost control represents a change in the way law firms view themselves. “Law is becoming more of a business, and you will see more of an emphasis on results than in the past,” he said. “I think some breakdown in the lock-step mentality might actually stick. Firms are recognizing that on a certain level, it makes sense to pay people in a way that reflects their performance.”

A return to the days when starting salaries at top firms were under $150,000 is unlikely, however. A legal education is still expensive, and firms at the top of the rankings — those that traditionally drive salary increases — will continue to compete for graduates of leading law schools. “Clients want the best talent,” Mr. Halgren said. “Law firms like ours have to recruit and retain that top legal talent, and we need to pay competitively to do that.”
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