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New York’s Am Law 100 firms are in a bind. They’re paying their associates record amounts (as high as $175,000 for first-years), but in today’s sluggish economy, those associates are billing fewer hours, and producing less revenue. That’s not a winning formula. If associates are getting more money for fewer hours, somebody must be paying the price. In many cases, it’s the partners (although clients who are paying higher hourly rates haven’t been left unscathed, either). While revenue for New York firms in The Am Law 100 grew at about 12 percent, their average profits per partner lagged about 5 percent behind. Some blue-chip firms were among the hardest hit, including Skadden, Arps, Slate, Meagher & Flom; Cleary, Gottlieb, Steen & Hamilton; Simpson Thacher & Bartlett; and Weil, Gotshal & Manges. The effect wasn’t subtle: At Skadden, for example, revenue increased almost 13 percent, but average profits per equity partner were flat. (Although at $1.6 million, most of Skadden’s partners should be able to scrape by.) Associate compensation may not have been the only culprit, but it was a big one — Skadden’s associate payroll costs rose about $45,000 per head, or about $51 million in total. That comes to $170,000 per equity partner. The top tier of firms are in the unenviable position of paying the highest salaries while getting the biggest share of their revenue from capital markets work and mergers and acquisitions, the two practice areas that fell furthest in 2000 and throughout 2001. Most partners agree that there’s no quick way out of this predicament. “Salaries never go down,” points out a partner at one New York firm. And while some partners think their firms won’t have to match last year’s extravagant bonuses, others aren’t so sure. “All it takes is one firm to announce bonuses, and the rest will fall in line,” says the managing partner of one New York firm. One way to control the bonuses may be to link them to billable hours, a trend that’s on the rise. “Historically, that was done in other cities, not in New York,” says Jonathan Jacobson, managing partner of Akin, Gump, Strauss, Hauer & Feld’s New York office. “But in 1999 and 2000, more New York firms took the approach of basing associate bonuses on the number of hours billed. We rejected the idea, but I think we’ll see more of it.” Among the firms where bonuses are in some way dependent on hours are Cadwalader, Wickersham & Taft; Chadbourne & Parke; Kaye Scholer; and Proskauer Rose. Hiring is another area where firms won’t be able to make dramatic changes in the short term. Most of the 2001 classes of lawyers, which will arrive this fall, were hired when the bloom was still clinging to the economic rose. Some firms may have seen the downturn lurking in the distance, but most kept their hiring at boom-year levels. And most of the classes behind that — the current summer associates — are also big. Skadden, for example, hired the biggest summer associate class in its history, and many others aren’t far off. If history is any guide, virtually all of them will receive job offers. But the number of incoming associates isn’t wholly beyond firms’ control. Marissa Wesely, co-chair of Simpson Thacher & Bartlett’s recruiting committee, predicts that fewer third-year law students will be hired. And Jacobson sees a reduction in lateral hiring of associates. Of course, there’s a dark, unspoken presence looming over everything — associate layoffs. More stringent reviews, a possible precursor, are already in evidence at firms such as Dewey Ballantine [" The Disappeared"]. “People are being looked at sooner, and looked at harder,” says Jonathan Lindsey, managing partner of the New York office of recruiter Major, Hagen & Africa. But firms are waiting to see how deep the downturn will be before biting the layoff bullet. And Richard Beattie, managing partner of Simpson Thacher, warns against “1991-style cutbacks.” Says Beattie: “People should have learned a lesson last time. A lot of the cutbacks were shortsighted. Firms found that they needed those people when things turned around.” Willkie Farr & Gallagher is one of those firms that learned a lesson, according to firm chairman Jack Nusbaum. After the firm trimmed its ranks through layoffs in 1991, “we found ourselves under pressure when the economy rebounded. Partners had to work a little harder than they wanted. So did associates. We’ve tried to be more careful in hiring as a result.” New Yorkers lay the blame for their associate salary woes at the feet of Silicon Valley firms, which boosted salaries in February 2000. Steven Franklin of Gunderson Dettmer Stough Villeneuve Franklin & Hachigan, the firm that fired the first shot in the salary war, tries to put the whole thing into perspective. “If you take the long view, we put two or three years of salary increases into one year,” he says. “We won’t see a lot of raises in the next couple of years, but it’s not a permanent degradation in terms of profitability.” From his lips to God’s ears, comes the chorus from New York.

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