Los Angeles' Allen Matkins cut first-year associate salaries on Tuesday, an indication that cracks are starting to show in the compensation model for new associates.
All first-years at Allen Matkins Leck Gamble Mallory & Natsis are now making $145,000, and those joining in the fall will make that much as well, said managing partner Brian Leck. Some associates at higher levels will also see their pay cut.
The firm has laid off a "small number" of people, but Leck said more layoffs were averted by the salary reductions.
"We have many good people and wanted to keep as many as we could," Leck said. "We believe it's in the best interest of our associates and our clients if we can keep more people rather than less."
Two years ago, associate salaries at top firms leaped to $160,000 and held at that rate last year. With the economic recession, there has been much speculation about whether firms would roll salaries back, and to how much.
Allen Matkins is a 200-plus lawyer firm best known for its real estate and land use practices that has enjoyed a spot in the middle of the Am Law Second Hundred for a while. It joins at least two other Am Law 200 firms that have cut salaries for existing first-years, including Cleveland-based Thompson Hine, and the now-defunct Wolf Block, based in Philadelphia.
But it's clear that firms high on the Am Law 100 list are salivating for a salary cut as well. It has been a sure-fire conversation starter for months now. But so far, no chairman or managing partner has gone on the record saying he or she wants to cut salaries, or by how much.
A firm in the top 10 to 15 will likely never do it, said consultant Peter Zeughauser. It's the firms in the top 30 or 40 that may move the market, and they will do it only if they've "exhausted all other options."
"That's where it's going to get interesting," he said.
The salary wars first started in California during the dot-com boom when venture-startup firm Gunderson Dettmer Stough Villeneuve Franklin & Hachigian said it would pay all associates $125,000, forcing competitors to follow suit. New York firms reignited the war in January 2007, hiking starting rates to $160,000. Most major California firms followed suit for their New York associates but held the line in-state at $145K until Orrick made a move to $160,000 in May 2007.
This year, many large firms have frozen associate pay, deferred start dates and conducted layoffs.
But cutting pay for incoming associates has been off-limits so far because it affects a firm's ability to recruit top talent, Zeughauser said.
"They want to do it. [But] if the market doesn't follow, then they are left out there alone. ... They need to be convinced that the market will follow," he said. "That means one or two market leaders need to do it first."
One Am Law 100 firm is cutting salaries of incoming associates. Last month, Richmond, Va.-based McGuireWoods lowered starting associate salaries from $160,000 in major cities to $144,000 -- a 10 percent drop. In offices outside major cities, starting associate pay also dropped a tenth, from $145,000 to $130,500, according to managing partner Thomas Cabaniss. The firm froze pay for current associates.
Katharine Patterson, with PattersonDavis Consulting, expected some cracks to show up soon in the incoming associate compensation model.
"Recession is catalytic to change in law firms," she wrote in a recent column for The Recorder.
"This legal recession should result in several great leaps forward: lockstep compensation will die (at last), replaced by more dynamic models that account for productivity and contributions to the firm's long-term institutional identity," she wrote. "I am waiting for 'the reverse Gunderson' -- that moment a big firm officially brings starting salaries down to $145,000. Being the first will take courage, but will forge a better compensation landscape."
On Tuesday, she said Allen Matkins might not be big enough to spark change among the top players, but it's a start.
"This is the law firms responding to the economic climate of their clients," she said. "I don't think it's a bellwether of all firms, but I do think it's an indicator of a smart management thinking proactively rather than reactively."