Originally published on August 24, 2009 in our free BigLaw newsletter.
A chilly breeze has blown over the legal profession for the last year. Did I say "chilly breeze"? Make that a hurricane, with gale-force winds. But recent reports indicate that, while the storm is far from over, the winds may have slowed. The hurricane, it seems, is now a tropical storm.
The prospect of a meteorological shift raises countless questions about what large law firms will look like when we emerge from our storm cellars. Will the leveraged business model survive? Is the billable hour dead? And what will become of the famously — or infamously — generous associate salaries?
Salaries Stand Still …
According to the National Association for Legal Career Professionals ("NALP"), its recently released 2009 Associate Salary Survey "reflects what is likely to be the apogee of large firm salaries, and represents the culmination of increases since 2006." In large markets, NALP announced in a press release, the prevailing salary stood at $160,000 — a figure that, two years ago, had been reached only by firms in the New York market. But, NALP warns, "the fact that during the period following April 1, 2009, some large firms were cutting salaries means that the $160,000 figure may not be sustained in many markets."
Indeed, for firms nationwide the "overall median starting salary was $130,000, and ranged from $70,000 in firms of 2-25 lawyers to $135,000 in firms of 501-1,000 lawyers, and $160,000 in firms of more than 1,000 lawyers."
While some in the legal profession (i.e., associates) view pay cuts and freezes as yet another piece of bad news, a degree of salary depression may be just what the doctor ordered. According to some consultants, inflated salaries and the traditional lockstep system lie at the root of the economic problems experienced by large firms this year.
It's All Good (Macroeconomically at Least) …
"What has hampered the legal profession is the competitive constraint on recruiting," says Tim Leishman, who advises law firms on issues such as strategic planning, compensation, and professional development strategy. "When firms are competing for top talent, they don't want to do anything that sets them apart from their competitors. But this kind of thinking leads many firms to follow the market, in terms of starting pay and lockstep increases, when they really shouldn't be offering such high salaries."
"The legal community tends to judge a firm by its salaries," says Leishman. "The top students from law schools tend to apply to the firms with the highest salaries. Regrettably, there is a misconception that if a firm lowers salaries, in-house clients and others will assume that their hires are of lower quality." In response to that perception, Leishman explains, lower-tier firms began offering higher salaries to appear "competitive" and to attract talent, even when doing so was ill-advised.
According to Leishman, "this dynamic made no economic sense for a lot of firms, but they followed it anyway. Of course, it might be the right approach for some firms which, prior to the recession, were highly leveraged and had a lot of business. But many others simply didn't have enough work to sustain their associates. Thus, the firms were paying big market salaries for associates to do a fraction of the billable work generated at a big market firm."
Firms in the second and third tiers, says Leishman, need to be realistic about how many hours their associates can bill, and adjust salaries accordingly. If associates are not "working New York hours" for New York billables, Leishman asserts, the firm needs to reevaluate its pay structure.
But, while stagnating (or declining) salaries may seem like bad news, they may leave firms — and associates — better off in the long run. If a firm is paying its associates too much, Leishman explains, there is no buffer if business slows down. If, however, "salaries are leaner, and reflect a firm's projected business — rather than a somewhat arbitrary market rate — an economic downturn wouldn't necessarily result in widespread layoffs."
In other words, the massive layoffs and lower salaries offer a valuable lesson, and may provide a roadmap for firms in the new, post-Great Recession era.
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