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Law firms are blaming market demands for the latest round of associate salary raises, but they may have discounted an important factor in their decisions to boost pay � the client. This summer’s associate salary increases to $160,000 are a result of economic forces, say law firm leaders, that have required them to fall in line with competitors’ pay in order to recruit top graduates from top schools. But in trying to keep fresh talent coming through their doors, law firms have created some resentment among corporate clients who want to stop their legal dollars from flying out the window. “At some point, we’ll say we don’t want any associates on our matters,” said Steve Hantler, DaimlerChrysler A.G.’s assistant general counsel for government and regulatory matters. Those in law firm management admit that the raises make fledgling associates even less cost-efficient for law firms that hope they will stick around long enough to earn their keep. They also say, however, that their clients expect them to recruit law graduates from prestigious schools and those from the tops of their classes. “What are firms to do?” said Rob Walters, a member of the executive committee at Houston-based Vinson & Elkins. “Associate salaries are out of whack.” In July, the 759-attorney firm increased associate compensation in its Texas and Washington offices to match the $160,000 it pays its first-year attorneys in New York. The law firm was one of dozens this summer that raised salaries in offices outside of New York to equal the pay of their associates in the Big Apple. Orrick, Herrington & Sutcliffe helped spark the salary brushfire in May, when it upped first-year pay to the $160,000 mark and matched several New York firms’ first-year numbers. Since then, even firms with fewer than 400 lawyers have followed suit, including Washington-based Crowell & Moring; San Francisco’s Townsend and Townsend and Crew; and Munger, Tolles & Olson in Los Angeles. The arguably inflated salaries stem from the brisk business that law firms in general are enjoying at a time when the total number of law school graduates each year � about 40,000 � remains unchanged. Vinson & Elkins’ decision to increase pay for its associates came after the firm watched the moves by some other shops and “gauged the talent available,” Walters said. Slow on efficiencies Despite all the talk about work-life balance and meaningful assignments, the highest salary bid continues to draw the best candidates, he said. He added that if his firm has to dip into its profits to cover the costs of the salary increase, so be it. Jonathan Oviatt, general counsel for the Mayo Clinic, said he did not want to “second-guess” the move by law firms to increase associate pay. Still, he said that law firms generally are quick to raise their hourly rates and slow to increase internal efficiencies as their costs rise. “Historical law firm profitability is largely based on annual fee increases rather than law firms improving their ‘quality and value proposition’ through internal efforts at standardization, coordination and effective use of technology,” Oviatt said in an e-mail message. He continued: “I expect in-house counsel will increasingly object to annual fee increases proposed by outside counsel � especially if we do not see outside counsel focusing on efficiency in a manner comparable to what we [in-house counsel] live with on a daily basis.” Even if firms hold steady on fee rates, they are likely to become less charitable with discounts on those fees, said Ward Bower, a consultant with Altman Weil. “There will be less wiggle room,” he said. ‘Very angry’ Susan Hackett, general counsel for the Association of Corporate Counsel, said that she is “very angry” about the recent raises. Besides the increased resistance that clients may exert in paying for associates to work on their matters, she also predicts heightened billable-hour expectations from firms to cover the costs of the increases. Such expectations will lead to bill padding, she fears. Hackett said her concerns go beyond the cost of services to corporate counsel. She worries about the impact that high salaries may have on the profession in general. “The real losers are the associates,” she said. She is concerned that higher billable requirements will worsen an attrition rate that reaches nearly 80% by the time associates are in their fifth year of practice at large firms, according to NALP, a Washington-based nonprofit group that tracks jobs in the legal industry. Higher pay may well intensify already high anxiety levels among associates, said Andrew Urban, co-managing partner at 477-attorney Mintz, Levin, Cohn, Ferris, Glosky and Popeo. The Boston-based firm raised its first-year associate salaries to $160,000 in May. “I guess at some point the high salaries that law firms are paying do translate into increased demands of associates,” Urban said. He added, however, that his firm has not increased its billable-hour requirements for associates. Hackett also worries that law firms intent on covering the costs of raises may have less time to provide for associate mentoring, she said. And, law firms may become less tolerant of mistakes made by associates who are still in the learning process because they are so expensive. Hantler, with DaimlerChrysler, said he increasingly instructs law firms to use the same associates on different matters to avoid starting from scratch with every case. “We don’t want to educate 10 different associates,” he said. Bower, the consultant, expects that some law firms will begin reducing their incoming class sizes or, at least, not increase them. Instead, they will hire more contract attorneys to handle the work typically relegated to associates. And even though several midsize firms kept up with this round of salary raises, it is likely that only the megafirms will participate in the next one if it follows soon, he said. For those that do, they may see the cost of associate salaries eating into partner profits, which could make firms vulnerable to lateral defections, Bower said. Such a result is not out of the realm of possibility, said Robert Giles, managing partner of Seattle-based Perkins Coie. “If you take it through enough steps, that is certainly a possibility,” he said. The 576-attorney law firm recently raised its first-year associate salaries to $160,000 in its California offices.

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