Law Firms Slash First-Year Pay

Law firms including Cravath, Swaine & Moore LLP and Skadden, Arps, Slate, Meagher & Flom LLP cut year-end bonuses for first-year lawyers by as much as 71 percent, part of a bid to keep client costs down and ride out a recession that has forced structural changes in the industry.

Bonuses dropped for first-year associates at many top-tier New York firms while staying the same or increasing for more experienced associates. Bonus reductions, along with overall pay cuts, signal a diminished role for junior lawyers at the larger U.S. firms, said consultant Bruce MacEwen.

The industrywide move to cut pay is "reflecting, frankly, the low value clients place on junior associates," MacEwen, who is based in New York, said in a phone interview.

Facing a slowdown in work due to the financial crisis, law firms fired thousands of associates this year and last, forced new hires to delay starting dates and cut hours in exchange for reduced salaries. Demand for legal services dropped 6.8 percent in the first nine months of 2009 compared with last year, according to Citi Private Bank, a unit of Citigroup Inc.

New York firms including Cleary Gottlieb Steen & Hamilton LLP, Sullivan & Cromwell LLP, Cravath and Skadden Arps cut seniority-based bonuses from $17,500 to $5,000, a 71 percent drop, for first-year associates, according to the firms and people familiar with their policies. The most experienced associates get $30,000 or $35,000.

Other firms, such as San Francisco-based Morrison & Foerster LLP, Reed Smith LLP in Pittsburgh and DLA Piper LLP in Chicago, cut starting salaries for first-year associates from $160,000 to as low as $130,000 this year. Firms in cities including New York, Washington and San Francisco had adopted $160,000 as the industry standard beginning in January 2007.

Future Senior Lawyers

Cleary's managing partner, Mark Walker, said the cuts aren't a reflection on the value of young associates at his firm. The best are traditionally offered partnerships after spending eight years as salaried associates.

"The young lawyers today are the senior lawyers five years from now," Walker said.

Jeffrey Grossman, of the Legal Specialty Group at Wells Fargo & Co. (WFC), said U.S. law firms are cutting associate pay to stanch their decline in profitability. Even partners are taking home less, he said.

Today's economic justification, however, may reap rewards for law firm bottom lines tomorrow when revenue increases.

"It will be a future benefit," said Grossman, based in Charlotte, North Carolina. "It will change the cost structure for future years."

Client Pushback

An additional consideration in paring pay, the law firm consultants said, is the need to address increased pushback from corporate clients seeking reduced hourly billing rates.

"It's a philosophical reaction to the fact that clients are more demanding," MacEwen said.

Rates for the least experienced attorneys typically range from $250 to $350 an hour, he said, spurring some clients to complain they are paying top dollar for the training of young lawyers. The perception has existed for years and "bubbled to the surface" during the recession, Grossman said.

Young lawyers have "a lot of potential," said Brian Cabrera, general counsel of Synopsys Inc., a maker of software for chipmakers. "The question for the in-house lawyer is how much of that potential has been realized."

Cabrera said he recently asked a firm he wouldn't identify to pare its rate for some associates from $500 an hour to $400.

Reconfigured Compensation

"I'm willing to recognize that I am partly subsidizing associate training, but the firms need to pay for it, too," he said. The bigger firms — which often move as a bloc in setting pay — still recognize they need to nurture top young lawyers. As a result, Grossman said, some have reconfigured compensation to reward high performance.

Orrick, Herrington & Sutcliffe LLP, based in San Francisco, this month said it would eliminate bonuses for first year associates, while keeping salaries the same. It instituted a new system in which they get raises based on performance rather than seniority.

The changes were made to align pay with performance and client needs, said Orrick Chief Executive Officer Ralph Baxter.

While compensation has dropped for younger associates, the most experienced associates have been spared, said Peter Zeughauser, a law firm consultant at the Zeughauser Group, based in Newport Beach, California.

"It's harder to replace those people," Zeughauser said. "They are fully trained, and they are viewed as keepers."

Sullivan & Cromwell this year said it's giving some of its most experienced associates, those who started at the firm in 2002, $5,000 more in bonuses than offered by Cravath and Cleary.

"We have always believed that generally the more senior classes are working the hardest," Sullivan & Cromwell Vice Chairman Joseph Shenker said in an interview. "They are also the most highly trained. It's fair."

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE