At the conclusion of 2002, bonuses returned, though at lower levels than before the tech bust. White-shoe firms in New York gave first-years $17,500 in bonuses. Other firms bestowed $15,000 upon first-years. Salaries at big firms on both coasts held steady at $125,000.
In 2004, starting salaries remained at $125,000, but bonuses escalated. Sullivan & Cromwell announced "interim" bonuses of $10,000 for first-year associates in October, while Philadelphia firms said they would boost pay to $115,000. At the close of 2004, bonuses at top New York firms had bounced back to as high as $50,000 for senior associates. Firms began hiring more summer associates for the 2005 season. By the end of 2005, bonuses had climbed to $60,000. Bonuses were also hefty in noncoastal states. Bryan Cave, with its largest office in St. Louis, paid starting bonuses of $20,000. DLA Piper, with its largest office in Chicago, increased bonuses by 10 percent, with senior associates receiving $65,000.
Then came the 2006 jump in starting pay from $125,000 to $145,000, the first salary increase since 2000. The very next year, big firms elevated first-year salaries to $160,000 plus bonuses.
"It was a second, more dramatic and more dangerous bubble," said Peter Kalis, chairman of K&L Gates. The associate job market during the past decade, he said, responded to false booms -- the dot-com bubble and then the structured finance mania. The fallout from the latter was "a massive correction on the market for talent," he said. "Why is this a surprise to anyone?"
In 2007, law firms were bustling with capital markets work, mergers and acquisition deals, real estate, life science and intellectual property matters, and more. Average profits per partner among Am Law 100 firms rocketed to $1.3 million in 2007, an increase of 68 percent compared with 2000.
At the same time, law schools were pumping out roughly the same number of graduates, about 40,000 per year, which contributed to the scramble for associate help. Importantly, tuition and fees for in-state residents at public law schools from 2000 to 2007 soared by 99 percent to $15,621, according to the American Bar Association. The rise in student loan debt to cover those rising costs weighed heavily on associates as they chose jobs after graduation.
A NEW ERA OF TRANSPARENCY
Meanwhile, firms were dealing with a new environment of transparency in the media. The advent of blogs -- particularly Above the Law, which tracked associate compensation with bloodhound perseverance -- intensified the competition and put firms' decisions in a spotlight.
"One-sixty was shorthand for what kind of firm you were," Alvary said. "The push to $160,000 put so much pressure on firms whose client base and rate structures didn't support it."
Benefits were one way that law firms tried to distinguish themselves to entice associates. For example, Nixon Peabody started a matching 401(k) plan for associates. DLA Piper gave a $2,000 reimbursement to associates and other employees who purchased hybrid cars. Others launched day-care services for attorneys' dependents.
If associates had a stronger voice in law firm operations, clients had an even louder one. Bristling under the increase in outside fees to help pay the salaries, clients began demanding more from firms. They were increasingly resistant to providing the training for new associates. Law firms responded with mentoring programs and more attention to professional development. Clients also strengthened their calls for diversity among outside counsel, which prompted firms to intensify their efforts to recruit and retain more minorities.
"Clients have a stronger and stronger voice about what they like," said Reed Smith Chairman Gregory Jordan. "We listen to them more."
Firms more frequently referred to their "culture" as one that promoted teamwork, collegiality and a client focus. In April 2007, Nixon Peabody commissioned the production of a funk-influenced song, distributed to attorneys internally, to celebrate its culture by declaring that "everyone's a winner at Nixon Peabody." The firm took a ribbing for the creation from blogs and other media after it was leaked to Above the Law.
Whether the changes at firms were genuine or mere window dressing, they indicated that firms were taking a more outward-focused approach to running their businesses.
Then came the collapse of Lehman Brothers Inc. and the near-death of Merrill Lynch & Co. in September 2008, kicking off a dramatic plunge in global markets and highlighting the critical shortage of available bank credit.
The events of 2008 and 2009 -- associate layoffs, deferred start dates, bankrupt firms, slashed salaries and bygone bonuses -- brought a radical diminution in power for budding attorneys at large law firms.
"The first-year lawyer today is coming into a much different world than the one I came into," said Leatherberry, the Vinson & Elkins attorney. With finance work, deals and real estate nearly dead, so was the associate job market, even for top graduates from strong schools. "It's tough to get the job, and then you're competing with other associates for work where there's just not a lot of work," Leatherberry said.
Going forward, that competition may intensify. One of the most profound changes to develop at the end of the decade has been in the way associates are paid. Several firms this year -- including Orrick, DLA Piper, Wilmer Cutler Hale Pickering and Dorr and Morgan, Lewis & Bockius -- announced that they were eliminating lockstep pay, which compensates associates primarily on their years of service.
Under the new merit-based system, associates after the first couple of years are evaluated and compensated based on performance. Several firms had begun moving away from lockstep by 2004, but now the trend is becoming more widespread, said Kalis, with K&L Gates.
One long-term change, he said, should come from law schools, which need to adjust to market conditions. "There's a sense of urgency here. These young people are coming out on a conveyor belt," he said.
Alvary, the consultant, said that many firms that launch merit-based systems will need to make changes, some significant, during the next year or so, especially as clients demand more alternative fee arrangements. She also expects firms to revisit compensation based on geographic market.
Jordan, at Reed Smith, agreed: "Law firms have felt a level of pain and gotten a closer look at the abyss than ever before. The lessons learned burned a little more deeply."
One of those indelible lessons, he said, has been "avoiding overhiring" and "committing to irrational compensation."
For additional information on notable events and trends over the last decade, see The National Law Journal's special report "The Decade's Biggest Stories."Subscribe to The National Law Journal
