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For many major West Coast law firms, the big question on everyone’s mind is no longer whether they’re going to raise associate salaries: Several have already lifted first-year annual pay, with most now paying $160,000 in New York. Now observers are wondering just how the firms are going to manage this new major expense. It’s got to come from somewhere, whether it’s skimmed off profits-per-partner, increased billable-hour requirements or from raised rates, and that has some in-house counsel nervous. “I don’t think the partners have any intention of picking up the cost,” said Susan Hackett, senior vice president and general counsel for the Association of Corporate Counsel. “Associates who hear they’re going to get more money, after the first 10 seconds they say, ‘Oh crap. What does that really mean?’ It means if you have a Saturday, it’s gone.” Further, clients may demand that first-year associates not be assigned to their matters, she said. “Clients don’t want to pay $250 an hour for someone with no skill set,” she said. The salaries and bumped-up rates will actually drive business away from major firms, Hackett believes, and into so-called “second-tier” firms or legal service companies. Several of the other firms that raised first-year salaries said clients and incoming associates � who already expect to work exhausting hours � can rest assured. “Our management hasn’t tied the increases to rates or hour expectations,” said O’Melveny & Myers recruiting partner Brian Brooks. “We’re not going to raise rates for these salary matches � this is just part of the cost of doing business,” said Robert Beall, Sheppard, Mullin, Richter & Hampton’s administrative partner. “It’s just a cost we need to absorb.” Likewise, William Urquhart of Quinn Emanuel Urquhart Oliver & Hedges said the salary raises to the $160,000 scale will not have an effect on the firm’s billing rates, which are announced at the beginning of the year. Most firms had already made billing-rate decisions when they upped associate salaries this year, said Gregory Nitzkowski, the managing partner of Paul, Hastings, Janofsky & Walker. When asked where the extra money will come from, Nitzkowski pointed out the high demand for legal services. “We think it’s going to be another robust year,” he said. “We have a diverse and global practice and there’s a lot of balance that gives us consonance that this year will be a great year.” One partner at a firm that recently raised salaries said that firms with higher PPP will probably be able to eat the expense without much pain, but the less profitable firms will be more tempted to raise rates. “These raises represent an attempt to segment the legal market between the financially strong and every other firm,” said the attorney, who asked not to be named. Many industry observers doubted the money would come out of PPP. “Law firms are run more like a business and you’re not going to make a move that makes you less profitable,” said Daniel Hatch, the head of the Southern California partner practice group for Major, Lindsey & Africa. “There’s got to be some correlation with billing rates,” San Diego-based recruiter Larry Watanabe agreed. “The firms are so competitive now on profit numbers that I find it hard to believe that partners are going to accept they’re going to make less money. PPP is the measuring stick most partners glance at in this market.” On Wednesday, Kirkland & Ellis became the latest firm to increase associate salaries, moving to the $160,000 scale in New York, a day after Wilson Sonsini Goodrich & Rosati did the same. Kirkland is adopting a hybrid version in its California offices, mirroring the higher New York scale for the first several years, and then moving to a lower scale. For example, California second-years will be at $170,000 � the same as New York � but fourth-years will be at $190,000, much like the $145,000 scale many California firms have recently adopted. Wilson Sonsini raised to the $145,000 scale everywhere but New York. The ACC’s Hackett said she’s heard from corporate counsel who feel powerless in the face of expected rate increases from their outside firms. “What they’re confused about is what they can do about it,” she said. “Most think they don’t have a lot of choices for sophisticated legal services.” “Why not to go to second-tier firms, where there are plenty of talented and brilliant lawyers,” she asked, “where if they’re billing $250 an hour it’s because they have 15 years of experience?” Some in-house attorneys say there will be indirect fallout, too. Associates accustomed to higher pay scales may have a harder time leaving the firm for an in-house job. Correspondingly, company legal staffs may have to sell the comparative ease of an in-house job even harder when trying to attract associates from firms. And general counsel will still feel the weight of the firm salaries “when they have to figure out what to pay their own staffs,” said Martin Collins, general counsel for the San Jose-based chip equipment maker Novellus. Although many associates already leave firms for in-house jobs because the hours are usually better � and not for financial reasons � money is still important to people, he said. It’s going to be that much harder to take an in-house job. “Most people tend to set their lives by what they get paid,” he said.

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