Biglaw, Money, Skaddenfreude, Williams & Connolly

Reading the Associate Compensation Tea Leaves
(And a Digression on Billable Hours)

100 dollar bill Above the Law Above the Law law firm salary legal blog legal tabloid Above the Law.JPGWe’re a week or so into 2008, which raises the question: a new year, a new associate pay raise?
One might expect pay raises to be announced around fall recruiting time, to entice the 2Ls. Historically, however, the last two base salary increases were announced in January (perhaps in an effort to reduce the post-bonus exodus of associates). In January 2007, Simpson Thacher announced its new pay scale, with a $160,000 starting salary. The prior raise, by Sullivan & Cromwell to $145,000, was announced in January 2006.
But don’t expect more of the same in January 2008. From the National Law Journal:

As law firms wrapped up operations for 2007, the associate compensation picture looked eerily similar to the boom before the bust seven years ago.

The ratio of bonuses to base salaries for first-year associates at the nation’s top law firms in 2007 was on par with the figures in 2000, a year that precipitated a dramatic plunge in those annual perks that help to make the punishing associate hours more tolerable.

For 2007, beginning associates made as much as $45,000 in bonuses in addition to the $160,000 in base pay at top firms in New York and on the West Coast, with some shops doling out “special bonuses” and getting bragging rights ahead of competitors.

But all that cheer in 2007 may become a distant memory as 2008 is looking increasingly leaner.

“There’s more concern out there now than there was in the summer,” said James Cotterman, an attorney-compensation consultant with Altman Weil. “There’s more talk about a recession.”

Indeed. If we’re not already in a recession, we’re about to enter one. Sure, some firms have strong countercyclical practices. But litigation and bankruptcy never make as much as transactional work and M&A in boom times.
More doom and gloom, plus the promised digression on billables, after the jump.

Still from the NLJ piece:

The last time that bonus amounts at top firms exceeded 2007’s percentages was in 2000. That year, the perks for beginning lawyers equaled 24.2% of total compensation. Back then, beginning lawyers at major firms were making $125,000 in addition to bonuses of $40,000.

Much of the good fortune in 2000 came from growth in the Internet sector, which buoyed a strong stock market and venture capital endeavors.

By March 2001, however, 10 years of sustained economic growth — the nation’s longest period on record — officially had come to an end, according to the National Bureau of Economic Research. The terrorist attacks on Sept. 11, 2001, sent an already faltering economy plummeting even further.

Bonuses in 2001 reflected the big changes. In sharp contrast to the previous year, first-year perks at top firms sank to 13.8% of total compensation, or $20,000. Bonus amounts fell again in 2002 to $17,500 for first-years and remained at that level in 2003. During that time and up to 2006, salaries for beginning lawyers remained at $125,000.

So batten down the hatches, Biglaw associates. We may be in for a few years of stagnant base pay and anemic bonuses (for people lucky enough to have jobs; layoff rumors are running rampant, and we’ll be writing more about those shortly).
Of course, it’s possible that a firm less hurt by the downturn could take the offensive:

But if the economy remains tepid, or grows worse, less homogeneity in bonus and salary structures is expected this year. Already, one firm, Washington’s Williams & Connolly, has raised associate salaries for 2008 to $180,000. The firm generally does not provide year-end bonuses. The question is whether other firms will follow that salary hike or go even higher.

“It’s a game of chicken,” said William Henderson, a professor at the University of Indiana School of Law — Bloomington. His scholarship focuses on law firm operations….

Altman Weil’s [consultant James] Cotterman agreed. He also expects new levels of market segmentation among law firms in 2008 and predicts that only “a handful” of firms this year will be positioned to raise pay again. He added that the stronger firms will see an advantage if the economy weakens in 2008 by hiking associate pay when they know that other firms will struggle or even fail to ante up.

“One of the times you want to play that card is when you know you have an upper hand in a challenging market,” Cotterman said.

So a pay raise isn’t out of the question — but we wouldn’t bet on that hand. We’d expect firms, even those that are weathering the storm relatively well, to sit tight.
We do agree about increased variation in law firm compensation structures. Check out this Chicago Tribune article, about Chapman & Cutler adopting a two-track system (already used by a number of firms, especially in D.C. — e.g., Hogan & Hartson; Wiley Rein).
In short: Biglaw associates, put that bonus money in the bank, and fasten your seatbelts. It’s going to be a bumpy year.
Update / Digression: From the Tribune article about Chapman’s new system:

Chapman and Cutler reluctantly increased starting salaries to $160,000 because the partners felt they had no other choice, Cosgrove said. Several years ago, it held the line on associate salaries, while the rest of the Chicago market went up. It ended up paying a price in recruiting, Cosgrove said.

Before the most recent raise went into effect on Sept. 1, the firm polled associates and partners on some new approaches.

When it offered a choice of hours to third-years, the class of 2005, three of the nine associates chose to work 2,000 hours, Cosgrove said. Realistically, these lawyers likely will bill more than 2,100 hours, making the difference between the lower tier and higher tier significant, he added.

First-year associates still do not have a billable-hour requirement. Second-years are expected to bill at least 1,850 hours, which means about 37 hours a week, assuming a 50-week work year. To bill 37 hours a week, lawyers generally have to work about 47 to 50 hours.

So, ATL readers: How does that conversion rate of hours worked to hours billed sound to you? High, or low, or somewhere in between?
Leaner pay, bonuses may be reality in 2008 [National Law Journal]
Billable-hours choice eases rate pressure [Chicago Tribune via WSJ Law Blog]

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