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Looking at the results of this year’s Legal Times 150 survey, it seems a lot of managing partners are suffering from what might be termed market schizophrenia. On one hand, they’re hiring associates at a record clip. On the other, according to a survey released last week by Citi Private Bank’s law firm group, they have a distinctly bearish view on the current legal market. “It looks like we’re in a bit of a repetitive mode, back to when the tech bubble burst in 2000,” says Dan Dipietro, head of Citi Private Bank’s law firm group. “Right now there’s some softness in demand [for legal work], and nobody is sure if it’s temporary.” One thing managing partners are clear on, though, is the impact that soaring associate salaries and class sizes are having on firm profits. To the tune of 97 percent, managing partners say associate pay raises � stemming from the jump in 2006 and the subsequent hike touched off this past January by New York’s Simpson, Thacher & Bartlett � are the biggest cause for rising costs. To alleviate some of that financial burden, more firms have instituted mandatory hour requirements or taken money out of the year-end bonus pool to help defray associate salaries. “After the increase in salaries, firms have put in billable-hour standards for associates,” says Ed Wesemann, a consultant with KermaPartners. “But really, it’s part of a cathartic experience where firms have to ask, �Do we have a client base that can pay for this?’?” Questions over how to pay associates, combined with a slowing legal marketplace, have led to declining optimism among the more than 100 managing partners surveyed by Citi’s law firm group as part of its Managing Partner Confidence Index. Roughly seven out of 10 managing partners anticipate firm expenses to jump by more than 5 percent in 2008, in part due to higher associate costs. At the same time, revenue growth is expected to hover around 3 percent. ANOTHER TALENT GLUT? So, is Citi’s Dipietro right about the legal market being headed for a fall reminiscent of the tech bubble? In 1999, you might recall, Silicon Valley’s Gunderson Dettmer Stough Villeneuve Franklin & Hachigian grabbed the attention of every big law partner back east when it upped the ante for top talent by raising first-year associate salaries from $100,000 to $125,000. Soon most large Washington firms swallowed their doubts and matched. In the end, they had little choice. Times were good, and money was being tossed at associates like it was being printed by Parker Brothers. Jobs were plentiful as law firms struggled to find enough lawyers to shoulder their burgeoning workloads. Arnold & Porter typified this trend by bringing in more than 70 associates to the D.C. office in 2000. But then the stock market cratered. Goodbye, raises and fat bonuses. Hello, layoffs and “right-sizing.” Some firms were punished harder than others, but the market rebounded. Flash forward to today: “The industry had enjoyed a great period from 2001, largely because associate compensation was kept flat,” says Citi’s Dipietro. “For the first time since then we’ve had two rounds of raises, and as a result, firm expenses are growing faster than revenue.” But that is not deterring big firms in Washington, which are showing little sign of a hiring slowdown. This year, according to the LT 150, the 30 largest offices in the District combined to bring in roughly 870 associates. In terms of raw numbers of hires, it’s the biggest in the history of the LT 150 survey. And it far exceeds last year’s already-large pull of about 700 associate hires for the top 30 firms. Notable climbers include New York-based White & Case, which is bringing on more than 20 associates in Washington, and Chicago’s Jenner & Block, which is adding 19 lawyers to bring its office head count to 76. In short, big law firms continue to lay on more talent, hoping they’re in the middle of a small dip in legal business and not on the edge of a precipice. But in past busts, law firm hiring has been a lagging indicator, leaving firms burdened with substantial excess capacity long after the flush times have faded. “We’re still seeing the effects of Arnold & Porter’s huge class following the boom,” says a Washington-based recruiter, referring to the firm’s haul in 2000. “We’ve been hearing from senior associates and junior partners who are looking elsewhere because there’s too many bodies.” Not true, says Thomas Milch, Arnold & Porter’s chairman, who says this year’s large number of hires, which is more than 70 lawyers, is based on the firm’s need for more attorneys and not an indicator of overstaffing. “The reason for the extra hiring is demand,” says Milch, whose firm is also a single-tier partnership, leaving senior associates few options if they veer off the partnership track. “We’ve always been attentive to the risk of hiring too many. But we made the judgment that we needed to take on that risk because right now we’re busy.” PAYING FOR PERFORMANCE Beyond the decision of how many offer letters to send out, there’s also that not-so-trivial matter of paying first-year associates the market–leading starting salary of $160,000. “It’s amazing to see some of the firms who have come out and matched, and you immediately wonder how they’re going to afford that,” says a Washington recruiter. “It’s killing their profits.” Which is why firms have gone about getting to that $160,000 differently. Firms such as Covington & Burling and Finnegan, Henderson, Farabow, Garrett & Dunner pay the $160,000 with no strings. Others have minimum billable-hour requirements. That includes Patton Boggs (1,950 hours, plus 100 pro bono), Crowell & Moring (1,900 hours), and Miller & Chevalier, which pays first-year associates a base of $145,000 for 1,800 hours. Then, for each 50-hour increment, the associate gets a $5,000 bonus, going up to 2,300 hours. So a first-year associate will earn $160,000 at the 1,950-billable-hour mark. Miller & Chevalier notes that the hourly base can include up to 100 pro bono hours. “The reason we’ve done it that way is to be more flexible,” says Marianna Dyson, the firm’s managing partner. But recruiters and consultants say the new hourly requirements at some firms have caused class tension. “Some firms are looking for a work ethic from associates that they don’t expect from partners,” says KermaPartners’ Wesemann. “And that’s not going over well with associates.” At Dickstein Shapiro, associate bonuses that were awarded for extra billable hours have been scuttled. “Now that the salary is $160,000, we don’t give people a formulaic bonus,” says Dickstein Chairman Michael Nannes. The firm instead gives bonuses based on subjective factors like work quality. Nannes adds that the new round of raises resulted in a bit of associate discontent: “The concern is coming from associates who don’t want the increase in salary because they see that they’re going to have to work harder for the economics to work and they already like what they’ve got.” This year Dickstein Shapiro was perched atop the American Lawyer associate satisfaction survey. Nannes says the firm is trying to maintain morale by openly communicating about salaries and expectations. There are a few other ideas on associate pay being pursued by firms. At Howrey the firm is trying to end lockstep compensation for its associates. Howrey Chairman Robert Ruyak says the firm’s move has nothing to do with the associate salary wars and everything to do with moving to a better system for paying talented associates. “Law firms are afraid to break the mold out of fear of not being able to recruit the best people,” says Ruyak, who adds the firm has held a few pep rallies for associates fearful the new system is a way to cut salaries. “We think associates will want to work in this model.” Under the new plan, which is set to roll out next spring, Howrey first-years will start at the market rate of $160,000. After that, associates will advance through five different levels based on personal evaluations instead of seniority. Each level has a salary range, with some lawyers being paid more than market value and others possibly making less. Ruyak says the salaries for each level are still in the works. The evaluations will be based on performance and experience, which could shorten the partnership track for some and lengthen it for others. In turn, Ruyak says clients will be able to see precisely what they can expect from an associate. Each partner will be tasked with evaluating three associates. “Clients are asking what associates are capable of,” says Ruyak. “Now we can say, �This is what to expect at this level, and this is what you will pay for it.’?” Another approach is being taken at Duval & Stachenfeld, a 50-lawyer firm based in New York. It starts first-year associates at only $60,000, then, after a two-year training period, associates are promised the firm will take what top New York firms, such as Cravath Swaine & Moore, are paying in base salary and bonuses and top it by $10,000. “We concluded that we weren’t going to be able to effectively compete with the Cravaths and Lathams for the top talent out of law school,” says name partner Bruce Stachenfeld. “But we have a very sophisticated practice and need top-level associates; it’s a way of mining for talent.” Which is what every firm says it’s after: talent for the long haul � 2000 be damned. “This is a long-term investment and a long-term play,” says Eric Bernthal, the managing partner of Latham & Watkins’ Washington office. “We’re just not going to jerk in one direction or another.”
Nathan Carlile can be contacted at [email protected].

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