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Pay Cuts at Firms Gaining Momentum
The Legal Intelligencer
June 30, 2009
image: Caroline Fong
Schnader Harrison Segal & Lewis last week held what is becoming a common meeting at large law firms, to inform its associates, partners and staff that their salaries would be cut. Schnader Harrison became the fifth Pennsylvania firm in recent weeks to announce some form of pay cuts.
Though the firm said cash flow was not a main consideration in making the cuts, as more firms make these decisions, the issue of managing cash flow has come up as one of the factors that may have played a part in altering compensation models.
Bill Brennan, a consultant with Altman Weil, said he is definitely hearing, albeit anecdotally, about law firms facing delays in collections, which in turn is creating cash flow issues.
"But a more serious concern to law firms is the pipeline of work," Brennan said. "Although it was picking up in the spring, it has slowed down and that is becoming more of a concern."
It takes about four to five months from the start of a matter before a firm would typically see payment. As the pipeline slows, that means cash flow could increasingly become an issue in the coming months, he said.
To their credit, law firm leaders have done everything they could in the face of this recession, Brennan said. They can only control expenses. Revenue is controlled by client demand. So when revenue goes down, he said, the only thing firms can do is cut expenses. With little filling the pipeline, that may result in more layoffs or cuts to compensation, Brennan said.
Schnader Harrison cut associate salaries by $10,000 across the board. First-years in Philadelphia had been making $135,000.
Non-equity and equity partners saw a 5 percent reduction in their take home, though equity partners have the ability to make that up at the end of the year if the profits are there.
Schnader Harrison Chairman Ralph Wellington said the cuts were done on an annualized basis, so for associates, it would be a $5,000 cut for this year and partners would face a 2.5 percent reduction in total pay for this year.
Wellington said administrative staff making over $60,000 will also face pay cuts at a 3 to 5 percent range. The firm wanted to protect its lowest paid employees, he said.
One source said the reductions were not due to a decrease in work but were done as a way to manage cash flow concerns.
Wellington said all of the cuts certainly help to manage cash flow, but said the partner cuts were more a function of doing the right thing and making sure the whole firm shares in the decision. He said cash flow is actually a little better than the firm thought it would be. There was one month where two significant matters made cash flow an issue, but Wellington said they both have been resolved.
"The associate reductions are primarily driven by basically the readjustment in associate compensation in the industry," Wellington said.
But he said the firm didn't want to simply improve profitability by lowering salaries. Wellington said the partners had to share in the cuts too. The decision was driven by "being careful or more prudent in this environment," he said.
Base salaries for associates have typically moved up in a lockstep model with discretionary, billable hour and origination bonuses also available. Wellington said that model will pretty much stay the same but with the reduced base salaries in place.
