As midsize firms debate whether to follow the lead of their larger brethren on associate salary increases, they also have to decide if rate increases will foot those bills, potentially eating away at a rate gap that often attracts clients to the smaller firms.
Several midsize law firms and boutiques in New York have raised their associate salaries to compete with larger firms, while others are holding out, at least for now.
After Cravath Swaine & Moore and then dozens of large firms raised starting salaries to $180,000 this summer, midsize firms in New York, including Morrison Cohen, Otterbourg, Pryor Cashman and Duval & Stachenfeld, adjusted associate pay to fit their own economic model.
Some firms acknowledged they raised associate billing rates to help absorb the increased overhead costs.
But many of the midsize firms and boutiques raising salaries are not highly leveraged with associates, making salary increases more manageable anyway.
Meanwhile, Herrick Feinstein and other firms are holding out on increases for now, citing other advantages that attract top lawyers to their firms, including direct legal experience and flexible hours.
Overall, midsize firm leaders are aware of the tough positions they must weigh: retaining and recruiting top talent while maintaining clients through competitive, lower rates.
“There’s a balance,” said George Wolf Jr., managing director of Herrick Feinstein. “A midsize firm has to remain competitive in its ability to attract quality associates both out of school and laterals, as well as being attractive in charging fair rates to clients.”
Morrison Cohen announced to its associates Wednesday that it would increase the starting associate base salary to $170,000 a year, effective in September, up from about $160,000, said chairman David Scherl in an interview.
Associates of every level will see an increase of $10,000 to $20,000, with senior associates receiving the highest increases.
The firm has 102 attorneys, with about a one-to-one ratio between partners and nonpartners. It doesn’t have lockstep compensation by class year for associates.
“You can’t bury your head and pretend the salary increases don’t exist,” Scherl said. “We want our base salary component of our associate compensation package to always be near and within striking distance of the best of our largest firm competitors.”
Being competitive doesn’t mean the firm has to match exactly, he said, but “adjust accordingly.” He added that the associates pay package is also composed of performance bonuses and bonuses for bringing in business.
At the same time, Morrison Cohen’s billing rates for associates and senior counsel will increase, by an average of $15 an hour, to account for the increased pay, he said.
If larger firms are raising rates, “we can go up slightly in order to finance our compensation to nonpartners,” Scherl said. “We will still stay at a 30 percent discount to large firm competitors.”
“These market moves by the larger shops will continue to present us with a major competitive advantage on the client development side,” he said.
Duval & Stachenfeld, a 67-attorney real estate boutique, already raised associate salaries in 2014 to above market rate at that time, including $175,000 for first-year associates.
Bruce StachenfeldNYLJ/Rick Kopstein
Bruce Stachenfeld, a founding partner, said the boutique this summer decided to match the new Cravath salary scale up to sixth-year associates. Seventh- and eighth-year associates at the boutique are $15,000 below the Cravath scale.
Stachenfeld said the firm wants to compete for the same top talent as large firms. The boutique isn’t matching the Cravath scale completely because senior associates are expected to enter the partnership soon after, providing an alternative incentive to stay on.
The new salaries will cost the firm a few hundred thousand dollars, Stachenfeld estimated.
“So our profits will go down by a few hundred thousands of dollars. We don’t love that,” he said, but “is it enough to move the needle to raise billing rates? No.”
He added that the firm, with about 36 partners and 26 associates, doesn’t have a highly leveraged model. “If we were leveraged 4 to 1, this would be a horror show,” he added.
Stachenfeld said the firm will make ordinary annual rate increases but, “the billing rates we charge to clients are not correlated with what we’re paying our associates.”
The boutique also expects to need fewer junior associates over time, due to lower demand from clients to pay for untrained lawyers, he said.
Ronald Shechtman, managing partner of 152-lawyer Pryor Cashman, said the firm decided to raise salaries for partner-track associates by $20,000, effective July 1.
The firm already raised associate salaries last year for those with four or more years of experience. Now $150,000 is the starting salary for most first-year associates, while associates can earn more in bonuses.
Ronald ShechtmanNYLJ/Rick Kopstein
“Our pay scale does differ from Big Law. On the other hand, we don’t want to make that gap wider and we have had a very successful number of years,” Shechtman said. “We thought it was appropriate that [the associates] share in our success.”
In raising associate salaries, Shechtman said the firm considered the more than $1.5 million in extra costs it would bring. Pryor Cashman felt it was manageable, he said, considering the firm’s profitability and lower leverage model.
To mitigate some of the extra expense, Pryor Cashman increased associate billing rates in July, by about $10 or $20 more an hour. The firm will also make ordinary rate increases in January, Shechtman said.
Shechtman said he has not heard any push-back from clients. “Our hourly rates for associates differ by hundreds of dollars, so our cost model is different from most of Big Law,” he said.
The top 30 global law firms may be less rate sensitive, he said. But Shechtman said he believes the salary and rate increases will cause clients of other large firms to increasingly investigate fee alternatives, such as fixed fees and special discounts, and to refer work to firms with lower rates and different leverage models.
“It’s created a good deal of opportunity for us,” he said.
Daniel Wallen, chairman of 45-attorney Otterbourg, said the firm gave associates a “modest mid-year bonus” and then raised salaries for all associates, effective July 1.
He declined to specify the amount of the salary increases. In all, first-year associate compensation will total $180,000, including salary and bonuses, Wallen said.
“We absolutely have no intention of increasing our hourly rates to clients” to absorb the salary or mid-year bonus, Wallen said.
The extra cost will impact the firm’s profitability, but the firm’s goal to retain and recruit top associates was paramount, he said.
No Changes for Now
Wolf, of 135-attorney Herrick Feinstein, said the firm is not raising associates salaries, at least for now. The firm currently pays new associates just below $160,000.
“We don’t want to be followers, there’s no reason to do it in the middle of the year,” he said.
“Midsize firms cannot chase the compensation of the larger firms, in my opinion, and be successful because our billing rate structures are considerably” different, he said.
However, Wolf said the firm will consider raising associate salaries at the end of the year and “the decision will be guided by our desire to remain competitive in our marketplace.”
He said any possible salary increase will not result in raising billing rates. “We will not pass on those costs to clients,” he said.
Wolf disputed any pressure to raise salaries to attract and retain talent.
“There will always be attorneys who want to practice in a smaller, more intimate law firm than a mega firm,” Wolf said. He said associates choose law firms not only based on their compensation scale but quality of experience, training, upward mobility in the firm and flexibility of hours.
Morvillo Abramowitz Grand Iason & Anello is still considering whether to raise associate salaries, said Elkan Abramowitz, partner of the 36-attorney firm. The firm will likely make a decision next month, Abramowitz said. Its current starting salary is about $160,000.
He added it would be a problem to completely match Cravath’s associate salary scale.
“I don’t think we could afford to do that,” he said.
But, he said, “associates come to our kind of firm for the professional opportunity to work directly with clients and in small teams, and to get away from working on the larger teams of lawyers typical of big firms.”
He added, “They understand that with that comes somewhat different economics.”
Morvillo Abramowitz, like other white-collar defense boutiques, represents many individuals and extracting rate increases from these clients as a result of salary raises will be difficult, he said.
“There will be a day of reckoning one of these days,” he said about rate increases. “The rates can’t keep going up. At some point, the clients will say ‘nope.’”
Dewey Pegno & Kramarsky, a 13-attorney litigation boutique that often represents banks and corporations, has decided to keep associate salaries where they are now, but the firm will evaluate it overtime, said Thomas E.L. Dewey, a founding partner. Dewey declined to specify the firm’s range of starting salaries.
The firm is not changing salaries for now, he said, because it has a nontraditional structure: it doesn’t pay associates under a lock-step class system and it generally doesn’t hire first-year associates out of law school.
Dewey said his firm hasn’t had any difficulty attracting high-quality applicants from larger firms.
The primary reasons attorneys come to work at Dewey Pegno is the ability to obtain up-front litigation responsibly and its “small team” culture, he said. “We view ourselves situated very differently from large firms,” he said. “If there is pressure [for salary increases], we aren’t seeing it.”
Meanwhile, some of his firm’s corporate clients have expressed dissatisfaction about salary increases across the industry.
“We’ve heard some grumbling from institutional clients,” Dewey said.