Law Firms

The Chasm in BigLaw Management: Restore or Cut Salaries?

When news broke that Latham & Watkins plans to restore frozen associate salaries (on the heels of Above the Law’s report of Arnold & Porter’s intention to pay up deferred compensation), we wondered if this was a sign that more firms will return to pre-recession compensation models. And what, we asked, does the move mean for firms that cut first-year salaries, such as Drinker Biddle & Reath?

For Latham, the announcement could be a statement to the industry—and particularly to new law grads—that the firm is still on top. Latham & Watkins laid off more than 440 people in 2009, including first-years who had been at the firm for just a few months and plummeted from No. 7 to No. 17 in the Vault prestige rankings, which are based on ratings from law firm associates. Latham also had to conduct a second round of on-campus interviews this fall to fill its open positions.

“The firms are very sensitive to being perceived as a top-shelf firm,” Indiana University law professor William Henderson told the ABA Journal, “and part of that perception is being at the top of the salary scale.”

But a return to the high-water mark of 2008 salaries marks a new chasm between the economic models of Latham and several other BigLaw firms. “Some firms are looking to return to the pre-recession economic model,” says Ward Bower, principal of the legal consultancy Altman Weil, “which is one of high leverage, high salaries and increases in billing rates.” But for firms like DLA Piper that have cut salaries and remodeled their compensation structures, there is a new economic model.

“For the short term, there will be a divide until one of these economic models prevails,” Bower told the ABA Journal. And it won’t be surprising if the winning model involves lower starting salaries. The shrinking legal market, including smaller starting classes at many firms, has created a buyer’s market for firms and taken the pressure off them to offer high-end salaries for top-tier talent.

And the source of that talent may see a change as well, Bower says.

“At a number of firms, one thing learned in the past decade—because they had to go deeper into law school classes and recruited top students from second- and third-tier schools—is that these lawyers were just as successful [as their top-tier counterparts],” Bower says.

The economy, high tuition and geographic considerations have forced some law school students to choose lower-ranked schools, and law school rankings might not have the same stigma during recruiting season, according to Bower.

“This could be a new dawn for top graduates of second- and third-tier schools.”

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