‘Medieval’ U.S. Law Firm Pay Structure Buckles (Update1)
By Carlyn Kolker
March 16 (Bloomberg) -- U.S. law firms, including Orrick, Herrington & Sutcliffe LLP, Shearman & Sterling LLP and WolfBlock LLP, are abandoning tradition as they cut costs in the deepening recession by imposing merit pay, slashing salaries and generally putting an end to decades of associate entitlement.
The firms are responding to the plunge in corporate, real estate and finance work by overhauling compensation for associates, who often total as many as two-thirds of a firm’s lawyers. Some, like Orrick, are beginning to reward lawyers based on performance rather than seniority. Others plan to cut salaries for starting associates, just two years after top firms raised pay to compete for talent.
“In the current economic crisis, we see the final demise of the medieval guild in the American legal profession,” said Joel Henning, a law firm consultant at Hildebrandt International Inc.
Law firms have operated for decades with associate pay structures that don’t reward performance, Henning said. The industry’s retooling comes as dozens of firms including DLA Piper, the world’s second-largest law firm with 3,700 lawyers; Latham & Watkins LLP; White & Case LLP; Holland & Knight LLP and Orrick, have collectively terminated thousands of attorneys.
“One of the best things firms are doing is breaking the ridiculous lockstep structure of associate compensation,” Henning said. “There is no other profession that operates that way.”
1,100-Lawyer Firm
Orrick is a 1,100-attorney firm based in San Francisco whose clients include Wells Fargo & Co., the third biggest U.S. bank by deposits, and PG&E Corp., California’s largest utility owner. The firm said it plans to discard guaranteed raises to associates in July. It has fired lawyers twice in the past year, including 100 this month and 40 in November.
Associate pay increases will be based on merit, not just on seniority as has been done throughout the legal industry, Orrick Chief Executive Officer Ralph Baxter said in an interview.
The firm originally intended to introduce the change next year. It decided to switch in July because of the deterioration of the economy, Baxter said.
Orrick will also introduce new tiers of associates, or salaried lawyers, replacing the traditional single-track system where some become partners who share in the firm’s profits after about eight years, Baxter said. Under the new structure, associates will be able to stay at the firm permanently, drawing salaries, he said.
Law Firm Reforms
Orrick’s reforms will let lawyers know if they’re likely to make partner and allow those unwilling to work the long hours required for that position to stay at the firm, Baxter said.
Clients typically pay much less for work done by a law firm associate than that performed by a partner.
“We will be perceived as a law firm that is adapting to the marketplace,” Baxter said.
Washington-based law firm Howrey introduced a similar plan in January, and McGuireWoods LLP started one two years ago.
Associates are evaluated based on how many hours they bill, feedback from partners and client satisfaction, McGuireWoods Managing Partner Thomas Cabaniss said in an interview.
New York-based Shearman & Sterling also will base associate bonuses on merit, rather than grant them in lockstep fashion, partner Matthew Bersani said in February.
When Howrey announced it was switching compensation systems in 2007, the firm was seen as “committing suicide” because it wouldn’t be able to compete for personnel, said law firm consultant Peter Zeughauser, chairman of Newport Beach, California-based Zeughauser Group.
‘Substantial Number’
Now, Zeughauser said, “a very substantial number of firms are considering something like this.”
Howrey spent more than a year seeking advice from consultants and input from associates before finally implementing the new merit-based compensation program, firm spokeswoman Christine Till said in an interview.
The current standard for starting pay at the top firms, about $160,000, was set in January 2007 when New York-based firms including Simpson Thacher & Bartlett LLP and Sullivan & Cromwell LLP raised pay 10 percent from $145,000. Other firms across the country followed suit. Salaries for most senior associates at the biggest firms seldom rise past $400,000, Henning said.
Associate salaries at some firms are less than 10 percent of partners’ shares of the profits. Per-partner profit at New York’s Cravath, Swaine & Moore LLP was $2.5 million last year. It was $2.14 million at Philadelphia-based Dechert LLP, according to the American Lawyer, a trade magazine.
Richmond, Virginia-based McGuireWoods this month cut starting salaries by 10 percent, from $160,000 to $144,000, and froze pay for existing associates.
10 Percent Cut
Philadelphia-based WolfBlock cut pay at all associate levels by 10 percent in February to preserve five to 10 jobs, Chairman Mark Alderman said. The 300-attorney firm eliminated some positions, he said, declining to say how many.
Some New York-based and so-called national firms are also considering cutting first-year pay, according to two heads of large firms who declined to be named because the discussions aren’t public.
“It’s unprecedented to have a rollback,” said Zeughauser.
Other firms have introduced less drastic measures to keep down associate costs.
Leave the Firm
Pillsbury Winthrop Shaw Pittman LLP, the San Francisco- based firm whose clients include Chevron Corp., the second- biggest U.S. energy company, and Bank of America Corp., the biggest U.S. bank, announced this month it would pay associates a year’s salary if they left the firm and worked for a year at an approved charity or legal-services organization. The firm has fired 55 associates this year. The salary would be what the organization would pay them as an employee, the firm said.
“At Pillsbury, we start with the following premise,” said firm Chairman James Rishwain. “We are in a new economy, and no assumption is safe.”
Skadden, Arps, Slate, Meagher & Flom LLP, the New York- based law firm, will pay associates one-third of their salaries to work at public interest organizations for a year, the firm announced this month.
The firm is also making the offer to associates who were slated to begin working at the firm later this year, firm executive partner Robert Sheehan said in a March 12 memo.
The reduction in law firm compensation brought on by the recession may reverse years of excessive pay for attorneys, said Henning, the law firm consultant.
“This is an opportunity to do things that should have been done a long time ago,” he said.
To contact the reporter on this story: Carlyn Kolker in New York at ckolker@bloomberg.net.
Last Updated: March 16, 2009 13:22 EDT |
