It is a scenario we in the legal field have come to expect–announcements of associate compensation increases are responded to in waves. First the largest firms rush to match them, then the mid-size firms determine how much they are going to raise compensation, often not in a dollar-for-dollar match, and then there is the soul-seeking by the smaller firms. Can they afford to raise compensation at all?
In the aftermath of Cravath’s recent announcement of special bonuses this year–bonuses ranging from $10,000 to $50,000 on top of the normal annual bonuses ranging from $35,000 to $65,000–a number of large firms have, as expected, followed suit: Davis Polk & Wardwell, Debevoise & Plimpton, Sullivan & Cromwell, Milbank Tweed, Paul Weiss and Simpson Thacher & Bartlett.
Presumably the mid-size firms are weighing their options and the smallest firms are shaking their heads.
What is interesting at this juncture is that there are significant developments at the other end of the compensation continuum as well, particularly among mid-size and small firms.
Chapman and Cutler, a 220-attorney firm in Chicago, this fall started offering second-year associates the opportunity to choose between two pay plans– one with lower hourly billing requirements and less pay and the other with higher billing requirements and more pay. Based on both associate and client feedback, Dallas-based Strasburger & Price has replaced over 400 of its required 1900 annual billable hours for first-year lawyers with training hours devoted to associate development–mentoring, leadership development and pro bono projects, while keeping compensation at the same level.
Boston-based Lowrie, Lando & Anastasi, an intellectual property boutique launched in 2003, has grown to 27 attorneys in part by requiring just 1,600 hours from associates while starting them at $130,000, $30,000 below what large firms in the area offer. And Ford & Harrison completely abandoned billable-hour minimums for new attorneys, shocking the legal world that views billable hours as the bedrock of the business model, while also earning it some good publicity with potential clients.
In a particularly dramatic development, McDermott Will, a 1,000-attorney firm, has announced that it is hiring a cadre of attorneys to populate a new track the firm is creating– one that is not en route to partnership, works less hours (30-40 @ week), is paid less (@25% less) and is evidently billed out at lower rates. With the escalating volume and cost of e-discovery, contract attorneys have become fairly common, flying mostly below the firm/client radar. These McDermott Will attorneys, however, are being given a permanent, formal position in the structure of the firm. "The cost of document review has become intolerable for everyone," according to David Balabanian, head of Bingham McCutchen’s litigation group. In the world of full service firms, adding this track allows McDermott Will to retain both the quality control and the profit margin of work that might otherwise go elsewhere– to lower-cost attorneys, such as SQ Global Solutions in India, or to outside document review firms.
The coup de grace goes to Washington’s Howrey, with 618 attorneys, who earlier this year dropped lockstep completely in favor of a performance-based associate compensation system. We noted in our entry A Small but Important Step in Associate Compensation? DLA Piper’s distinction in paying associates differently based on practice area, and the potential that that raised for other types of compensation distinctions. Howrey has taken that to its logical extreme. It hasn’t been easy. Modifying evaluation forms, adding training programs and hiring personnel to implement the system has been a "tremendous amount of work," according to Edward Han, hiring and development partner. But the proof will be in the pudding.
THE IMPACT ON NIMBLENESS
With its compensation totally stratified, Howrey is now the poster child for variable associate compensation. It is posed to move forward into a brave new legal management world of, gasp, innovation.
It is an innovation that has already occurred in other tiers of most law firms. Dumping associate lock step compensation logically follows what has happened in partnership compensation. The lockstep approach is now the least preferred way of allocating law partner compensation in the US. Nonetheless, the largest and most profitable US and UK firms still retain a lockstep system, preferring the advantages of simplicity and congeniallity over the performance-based advantages of accountability and opportunity for reward. Perhaps these firms too will be the last to experiment with varying associate compensation. But there is speculation afoot that, particularly from a client’s perspective, challenges whether mega-firms with large numbers of expensive associates will be able to do the footwork to quickly respond to changing market conditions.
From the client’s perspective, these maneuvers by mid-size and smaller firms look promising. Wal-Mart has announced that it is putting a moratorium on paying across-the-board legal fee increases, which the company sees as largely driven by the recent jump in associate compensation. Other corporations have been equally vocal about their dissatisfaction with these increases. "I’m happy to train associates. I just don’t want to pay to train them," Mike Dillon, general counsel of Sun Microsystems Inc. declares.
Perhaps this is the end of the era of lockstep associate compensation and the beginning of the era of small and mid-firm glory.