For Law Firm Associates, It's Been a Decade of Thrills and Chills

For Associates, It's Been a Decade of Thrills and Chills

Leigh Jones

The National Law Journal

It was a wild ride for associates at big law firms during the first decade of the century. In the end, most everyone was a little queasy from the experience.

Between 2000 and 2009, law firms doled out jaw-dropping bonuses, lavished benefits like never before and hiked first-year salaries to a point that drew the envy of federal judges. The decade also featured mass job cuts, pay reductions and a decided shift in power for recent law graduates, many of whom, at the decade's conclusion, were clamoring for even part-time work at living-wage levels.

The manic-depressive era provided tough supply-and-demand lessons for law firms, some of which promise to endure.

The decade began with a flourish. In 2000, a strong economy, fueled by a hot stock market, a still-thriving technology sector and a federal budget surplus of nearly $240 billion, meant booming business for law firms and big raises for associates. Launching the salary-war salvo that year was Menlo Park, Calif.-based Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, which in February raised starting pay by almost 50 percent to $145,000.

The move set off a bicoastal frenzy, with law firms raising base salaries for first-year associates from $110,000 to $125,000. At the same time, major law firms handed out year-end bonuses of $40,000 for first-year associates. Orrick, Herrington & Sutcliffe announced bonuses that meant first-year associates could pull in $160,000. Ill-fated Heller Ehrman brayed that its entry-level associates in New York had the potential to make $150,000, including bonuses. Also joining the trend were a number of New York firms and Brobeck, Phleger & Harrison -- a San Francisco firm that folded in 2003 but one that perhaps best exemplified frantic growth during the tech boom. Some firms reported that they were turning away business because they lacked the attorney-power to handle it.

PING PONG IN THE BREAK ROOM

Vinson & Elkins attorney Jonathan Leatherberry was a first-year associate in 2000. It was a heady time to graduate from law school, he said. He received his juris doctor from Southern Methodist University Dedman School of Law.

The attitude among graduates "was like, 'I can go anywhere, and you should make me happy by letting me wear chinos and a golf shirt and having a ping-pong table in the break room,' " said Leatherberry, who will become a partner in the firm's Dallas office in January.

It was in 2000 that law firms began "nationalizing" associate compensation, said Paula Alvary, a principal of Hoffman Alvary & Co., a consultancy in Newton, Mass. Because of a shortage of qualified associates and the infiltration of New York and West Coast firms into regional markets, firms began homogenizing pay across their offices.

"They needed high-caliber associates and they had to inspire somebody to come to Cincinnati instead of Chicago," she said. It was a move away from compensating associates based on the individual markets of their offices' locations, and it was a strain on firms whose big-city practices weren't strong enough to cover the geographic differential.

The following year, the economy was a much different story. The effects of the tech slowdown were spreading. In February, the former Dewey Ballantine cut loose about 12 associates in New York. The decision followed reductions by Weil, Gotshal & Manges and Stroock & Stroock & Lavan, which said that the departures were a result of annual reviews. Industry consultants warned of leaner times ahead. "There are a number of firms that ought to be considering their survival strategies," consultant Peter Zeughauser said at the end of 2000. "For a lot of firms that took a hit in their economics to keep up with associate salaries, that's going to cause problems."

It did. An economy that was slowing during the first half of the year abruptly stalled following the attacks of Sept. 11, 2001. In October, Shearman & Sterling said it expected to winnow up to 10 percent of its associates, and the following month Holland & Knight rescinded offers for summer associates. By year's end, top firms on both coasts were telling associates that they would not get year-end bonuses. By early 2002, Brobeck had dropped 50 associates, mainly in its California offices and primarily from its business and technology practices, which gave it about 40 percent fewer associates than a year earlier. In addition, many big firms scaled back hiring for their 2003 summer classes and were left needing more talent once the economy improved.

"The [on-campus recruiting] engine was becoming obsolete," Alvary said.

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."