Will Downturn Force Changes in Associate Compensation?

Lawyer Pay

Will Downturn Force Changes in Associate Compensation?

Posted Dec 4, 2008, 08:37 am CST
By Debra Cassens Weiss

Bonuses for associates at several large firms are considerably smaller this year, reflecting a tougher economic environment for law firms.

But is lower compensation a temporary phenomenon or an indication of changes to come? Some Pennsylvania law firm leaders interviewed by the Legal Intelligencer suggested the tough economy could force a re-evaluation of associate compensation structures.

One leader raising the prospect is Drinker Biddle & Reath executive partner Andrew Kassner. He said that when economic times are bad, law firms re-examine their pay systems. "So I would assume the law firm industry as a whole is going to take a look" at their compensation structures, Kassner told the Intelligencer.

Other leaders who discussed the possibility with the Intelligencer did not want their names used. One predicted that law firms, particularly those with lockstep pay increases, will use the economy as a reason to "really re-examine associate compensation generally, including the bonus model." He said firms will likely move toward a greater emphasis on merit-based pay, which could mean a larger focus on bonuses.

Another local firm leader said law firms have reduced staff costs through technology and greater efficiency, but the savings have been “more than eaten up by associate compensation costs." Clients are pressuring firms not to raise rates, making it difficult to maintain profit margins. As a result, the leader said, firms are going to have to find other ways to be more efficient, and it will likely come from a change in fee arrangements or compensation structures.

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Posted by B. McLeod - 1 month, 4 days, 11 hours, 24 minutes ago

To the extent that cessation is a “change,” and halving bonuses is a “change,” the answer is already clear. But more generally, the $170,000 starting salaries and the “lockstep” increases and bonuses are also likely to change. They should change, because they were never supported by sound (or really any) business judgment. We can assume that once the cost of these practices must be born out of partner margin rather than by clients, they indeed will change. It speaks poorly of law practice models that an economic crisis should be needed to bring review of fundamentally foolish and wasteful practices. Change we need!
Posted by Tom - 1 month, 3 days, 12 hours, 49 minutes ago

I went to a top 20 law school. I deserve $170,000 to look at documents in a warehouse while charging lucky clients $350 an hour.
Posted by Brian - 1 month, 3 days, 12 hours, 14 minutes ago

Mr. McLeod: your premise appears to be that PPP is sacrosanct. Isn’t the idea of partnership sharing the losses as well as the gains? Increases in billing rates and PPP have generally outpaced associate compensation over the last several years so why shouldn’t profits now remain flat, or even contract, along with - or instead of - bonuses and associate and staff salary increases?
Posted by LM - 1 month, 3 days, 12 hours, 5 minutes ago

You need 170k a year to pay back the student loans your top 20 law school charged you because they wagered you were going to make 170yr after graduation and you also believed that wager and paid the school in advance… Now that the music has stopped somebody’s going to be left without a chair…
Posted by B. Mcleod - 1 month, 3 days, 11 hours, 44 minutes ago

Many thanks to Brian for brightening my morning. “Deadpan” is a fading style, but I love it. Really, one of the best posts I have read in years.
Posted by Tara - 1 month, 3 days, 11 hours, 19 minutes ago

The only way large firm associate pay will change is if the client wakes up one day and says “$350 an hour- whaaaaaaaaa”. But it is not really the large publicly held corporations’ money anyway, so they don’t care. Try to get a privately held to pay that- unless they’re just rolling it in they will not pay that amount.
Posted by JAK25 - 1 month, 3 days, 11 hours, 14 minutes ago

Perhaps the law firms could learn something from the accounting firms (which are chock full of lawyers anyway, but they tend to have much better business sense because they work with accountants, economists, and other professionals). Salaries at the Big 4 are confidential, and not all people are paid the same amount. Why does this make sense? Not everyone is WORTH the same amount. With confidential salary information, the firms suddenly have unbounded flexibility to structure their business around their client’s needs, rather than their own goals of boosting their own image by competing in the PPP column. The only person who gets burned here is the junior staff, who will have a lower starting salary than they otherwise would, but ask yourself - are you worth $160K your first two years out of school? (NOTE - first and second year associates are not allowed to respond to this question.) The current compensation structure at the AmLaw 200 firms is an unsustainable house of cards.
Posted by cpav - 1 month, 3 days, 10 hours, 50 minutes ago

A quick note to JAK25 - the Big 4 dont have lockstep pay increases, but they still keep you in a “salary band”. Most of the time you are only making 5-6% more or less than people in your same class. The pay is not that much different. But I agree it is at least a step towards recognizing some staff are more valuable than others.
Posted by Shamus - 1 month, 3 days, 9 hours, 44 minutes ago

This will go down EXACTLY like it did in 2000- associates will be told they need to bill more hours for the same pay in order to “get through these tough economic times.” There will be an implied promise that things will ease off once the economy improves. Then, when (or IF, the way things seem to be going,) the economy improves, the billables will stay the same.

And the associates that haven’t been laid off will be too scared to complain.

Welcome to BigLaw, folks.
Posted by WR - 1 month, 3 days, 9 hours, 11 minutes ago

cpav is right - Compensation is rarely proportional to productivity in a corporation. I saw it as an engineer in my first career, and see it as an associate in my second career.

It is human nature that we tend to make judgments on perception rather than actual facts. If BIGLAW is perceived as being less risky than the little local firm, the company will still pay BIGLAW’s asking price. Smaller companies and startups will continue to seek true value in their legal services. The market for legal services is huge and varied, and there are many different niches. I’d love to know just how much dollar percentage of the legal market BIGLAW actually represents, since most lawyers(70% according to hg.org) practice in firms of less that 10 lawyers, and 48% (id) are solos.
Posted by Rocco - 1 month, 3 days, 7 hours, 59 minutes ago

Bonuses are smaller??? What 75K instead of 100K?? And I’m supposed to feel sorry for associates who have made over 100K per yr and are now feeling some crunch from the economic downturn?
Posted by BigLaw Associate - 1 month, 3 days, 7 hours, 45 minutes ago

6 figure salaries for people that just came out of law school are an easy target to ridicule but is the ridicule really justified? In the context of the firm’s environment the salaries make sense and certainly aren’t excessive whe compared to partner distributions at the same firms.

Associates (and partners) at Biglaw make large salaries primarily because they typically work ondeals & litigation where lots of $ is at stake. Like a broker who sells a million dollar home getting a larger commission then one who sells a $25,000 row-home.

Assoc salaries have risen greatly for 3 reasons - (i) talent war between more firms that want to hire from top 20 schools, (ii) ever reducing chance of making equity partner and sharing in the real $, and (iii) high cost of top 20 law schools & LLM programs.

Assoc salaries at Biglaw are typically structured to be 33% (or less) of gross revenue when assoc bill 2,000 hrs.

Junior associates who bill appr. 2,000 hrs at $300 per generate $600,000 of gross revenue.
A salary of $150,000 to $200,000 is proportionate to the economic contribution the employee makes.

Top Biglaw firms have profits per partner greater than $1,000,000 per partner (though rarely allocated evenly).

But profits are distributed annually. So when the times are lean the firm naturally seeks to re-examine assoc compensation.

If a portion of the profits were retained for such downtimes, this wouldn’t be an issue.

But then it would be that much harder to make the $1million ppp mark for Am Law. And equity partners would make less $. So don’t expect that to happen any time soon.
Posted by Wrong - 1 month, 3 days, 6 hours, 47 minutes ago

BigLaw Associate,

The whole big law system is overpriced. You’re just a part of it. I do agree with you that within the system that you’re in you are paid fairly because billings, but the rest of your analysis is just dip. The assignments you do are not so extraordinary that at least 50% of graduating students each year could not do them. In the end though you rock because if someone or some entity is willing to pay you that amount -take it!. The best advice I ever got on compensation came from a professor who rhetorically asked what a job was worth- the answer: whatever someone is willing to pay.
Posted by ShowMeTheMoney - 1 month, 3 days, 5 hours, 12 minutes ago

Only big law firms would find some way to justify paying a first year associate with no real work experience $160k. Most inexperienced people starting their first real job in other industries (and in some smaller law firms) bust their ass to earn $40-60k/yr. First year salaries are just part of the problem, the billable rates for all big firms needs to be trimmed down. Yet another example of why lots of legal work is getting outsourced to India.

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