Is the big firm salary model broken? 

Posted: 1:00 am Mon, October 5, 2009
By Michelle Lore

Word that some big law firms may do away with lockstep pay increases and reduce their associates’ base salaries beyond the cuts already instituted comes as little surprise to legal trend watchers.

The Above the Law blog published a report late last month that Dorsey & Whitney is considering a revamp of its associate compensation system, including lowering associates’ base pay and adding a bonus for those who meet certain performance standards such as billable hours.

A Dorsey representative said the firm was “reviewing market data and considering adjustments to [its compensation] system which would emphasize associate contribution and core competencies.” (Dorsey declined further comment for this article.)

Jodi Standke, CEO of the legal placement firm Talon Performance Group, was not surprised that Dorsey is rethinking its compensation system.

“We’re expecting to see that happen across the country,” she said. “It’s just part of the change that the legal profession is undergoing right now.”

California attorney Ed Poll, a nationally recognized law firm management consultant, said that associate salary has to be brought in line with economic realities.

“Associates are going to be in for a little rough ride,” he told Minnesota Lawyer last week. “I think associates are now going to have to adjust their expectations and come down to reality. It’s a new reality.”

‘Out of hand’

For years starting salaries at big law firms around the country skyrocketed as firms competed for the best legal talent. New associates’ pay climbed to $160,000 a year at some national firms, including a few with local satellite offices. First-year associate pay reached a height of $120,000 a year at locally based big firms such as Dorsey and Faegre & Benson.

The swift upward march of associate starting pay ultimately proved unsustainable. The recession and near meltdown of the financial world took a heavy toll on big law firms, putting downward pressure on associate salaries. After Faegre laid off 29 associates last February, Dorsey instituted an across-the-board 10-percent cut in associate pay to avoid laying off any of its lawyers. Other local big firms quickly followed Dorsey’s example by instituting associate salary cuts of their own, including Gray Plant Mooty, Fredrickson & Byron and Lindquist & Vennum. Last month, Faegre announced that it was also instituting a 10-percent cut in its starting salary for associates.

With the news that Dorsey is contemplating another round of pay adjustments, other big firms in town are no doubt watching closely and re-examining their own salary costs.

The bottom line

Legal trend watchers say that firms are backtracking from the high associate salaries in part because they need to find new ways to maintain profitability.

“The costs of running a law practice just kind of got out of hand,” said Poll. “Firms now are trying to adjust and to some extent go back to where they were.”

Alan Haynes, director of the Career & Professional Development Center at the University of Minnesota Law School, views the changes to associate compensation as a market correction.

“Salaries were way too high across the board. Firms have recognized that and responded accordingly,” he said.

Along with the reduction in base pay, many large firms are doing away with the traditional automatic annual pay increase. Fulbright & Jaworksi, for example, announced last month that it was eliminating the lockstep advancement program and moving to a merit-based system.

“A number of law firms across the country are moving away from lockstep and moving to merit-based [raises],” said Poll. They are lowering base pay and putting people into categories or compensation levels in which they only advance to the next level if they earn it, he said.

Faegre was ahead of the curve in this regard, having eliminated its associate lockstep compensation structure several years ago in favor of a performance-based system for mid-level associates. Ann Rainhart, the firm’s director of legal personnel & professional development, said that neither the monthly salary nor total compensation is lockstep for associates beyond the first couple of years.

“Bonus decisions for associates are made at year end,” she explained. “An associate’s monthly salary for the coming year is set based upon his or her total compensation — salary plus bonus — for the year just ended.”

Some legal professionals say that large firms are simply taking a cue from smaller firms, which have traditionally operated on a pay-for-performance model with their associates.

“Big firms haven’t always paid for performance so much as they have made an investment and taken the risk that people will stay around long enough to make partner,” said Nancy Lochner, director of career services at Hamline University School of Law. “Small firms pay for performance more than they make an investment.”

Client-driven

Legal experts say that clients, who are no longer willing to foot the tab for training lawyers, are a driving force behind the salary retreat.

“That kind of thing has gone by the wayside,” Poll reported.

Standke agreed. “In-house counsel, particularly of large organizations, have made it really clear that they don’t want to pay to have law firms train their associates anymore.”

Cindy Eidnes, division director of the placement firm Beacon Hill Legal, said that clients are also looking for ways to avoid huge, unpredictable legal bills.

“Corporate clients are putting huge pressure on firms of all sizes to help balance their legal budgets,” she said.

Recruiting effects

Law school placement professionals say students, who have been closely monitoring the struggles of law firms in the new legal marketplace, had some idea that major changes were coming to the traditional associate compensation model.

Lochner said that even with the reductions the big-firm salaries will still be “very handsome” compared to the rest of the market. “It’s nothing to sneeze at to begin with,” she said.

While some current big-law associates upset with the changes to their compensation structure might leave for other opportunities, experts predict that the number will be low given the current economy.

“It’s easier to make these kinds of changes when there aren’t a lot of options for the people affected,” Eidnes pointed out. “In this market right now … people are feeling fortunate they have a job.”

It’s also doubtful that the rollback in associate pay or the changes to their compensation structure will affect large law firm recruiting.

“It’s just that it’s a market where if a student wants to do that sort of work, the firms are in a position to offer whatever
salary they wish to offer,” Haynes said.

Poll predicted the changes in the big-law model will likely be much more sweeping than just lowering associate pay and instituting performance-based raises. Firms are looking at what else they can do to maintain and increase their profitability, he said.

Haynes also believes that more major changes are on the horizon. “As time goes on, firms will begin to see what they can do and where they can be a little more creative,” he said.