Associate Salaries, Billable Hours, Killing Lockstep, Salary Cuts

Baker Botts to 'Hybrid-Lockstep' in 2010(Plus more news from Reed Smith.)

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Baker Botts will be throwing itself into the killing lockstep camp sometime in 2010. A tipster reports:

So, Baker Botts – Houston (should be firmwide, though I don’t have have all the details) is adopting a form of the Reed Smith pay structure. …
My understanding may be imperfect, but the notion is that it’s something like a three part system of junior associates, mid level associates, and senior associates, with pay discrepancies laid out among the three. No more lockstep. Unclear what the bonus structure is beyond the nebulous “merit” nonsense.

The Reed Smith structure has received a lot of attention. Last month, we mentioned that Reed Smith will categorize associates as junior, mid-level, or senior associates. But those classifications won’t necessarily be tied to how long an associate has been out of law school. So you could see a fourth-year classified as a senior associate making significantly more than a sixth-year classified as a midlevel associate.
Today, the Legal Intelligencer reports that the Reed Smith plan will also include a cut in associate salaries and billing rates:

Reed Smith has cut starting salaries by about 20 percent for the 51 first-year associates set to start in January and, in turn, is cutting their billing rates by the same margin.

You can read the full Reed Smith memo about its salary and billing rate reductions after the jump.
Will the Reed Smith system become the template for associate compensation at other firms? Let’s take a look at what Baker Botts is planning.


Above the Law talked to a Baker Botts spokesperson about the firm’s hybrid-lockstep plan. Our sources had initially reported that Baker Botts would be moving in this direction before the end of the year, but Baker Botts told us that the move wouldn’t take place until 2010:

We are very much in the beginning/planning stages and only alerted our associates to the concept this past week. Most of your information is correct, with one exception — we are not rolling out the associate program until sometime in 2010. This program will be built upon our 2008 Associates Attributes Model, and will move the associate career track from the current “lockstep” model to a series of levels aligned with the model.

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One of our tipsters noted that, thanks to the Reed Smith and Baker Botts decisions, we could be seeing the future of associate compensation at regional firms:

Perhaps this is remarkable insofar as it is indicative of methods that slightly more regional firms (this TX firm, anyway) are using to approach the economic terror in which we currently live. Whatever. Profits per partner at Baker Botts are crazy high. C’est la vie.

The Skaddens and Cravaths of the world might have trouble convincing associates who have been at the firm for years to take less money than an associate who hasn’t put in their time. Will this form of “meritocracy” make more sense at smaller shops? We’ll see if Reed Smith becomes a market leader in associate compensation models.
REED SMITH — STATEMENT — ASSOCIATE COMPENSATION
(November 10, 2009) — Reed Smith LLP today announced a 20% reduction from the 2008 level in the hourly billing rates and annual salary levels for first-year associates in its 15 U.S. offices. These changes will apply to the 51 new lawyers joining the firm in January 2010.
“In response to our clients’ feedback and concerns about driving down the cost of legal services, we wanted to send a clear message that we are listening. So, we have therefore reduced both the rates and the salaries of our incoming first year associates” said Gregory B. Jordan, Reed Smith’s Global Managing Partner. “We have also launched a new competency based development program to better prepare our new lawyers to meet the needs of our clients.”
Annual starting salaries for the new associates beginning in January 2010 will range from $130,000 in major markets such as New York City, Chicago, California, and Washington, D.C. (down from a high of $160,000 in 2008), to $110,000 in Pittsburgh, PA. These actions solely involve the new associates entering the firm’s U.S. offices. Salary levels for 2010 newly qualifying lawyers in the firm’s European, Middle Eastern and Asian offices will be determined in the normal course of business during 2010.
“Our new U.S. starting salaries represent a reasonable and appropriate reset based on today’s economic environment,” said Eugene Tillman, the firm’s Global Head of Legal Personnel. “We believe this will put Reed Smith in a stronger business position in a changing marketplace while still providing fair compensation to our new associates.”
In conjunction with the new compensation, Reed Smith has also reduced the first year associate annual billable hour expectation from 1,900 to 1,700 hours, allowing additional time and opportunity to take advantage of the training and development programs associated with CareeRS™, the firm’s newly launched talent development initiative.
UPDATE: Here’s the internal memo about the Reed Smith changes:
From: Jordan, Gregory B.
Sent: Tuesday, November 10, 2009 11:31:15 AM
To: All Associates
Subject: New Associate Salary and Rates
I wanted to let you know that we are announcing today a 20% reduction in both the billing rates and the starting salaries for our 51 incoming U.S. associates who will join us in January. While the firm is continuing to perform relatively well during the global slowdown, these decisions are in response to our clients’ feedback about the need to drive down the cost of legal services.
While we have decided not to defer further the start date for the 51 members of our incoming class, we are informing them today about these changes. The changes reduce the billing rates and the starting salaries by 20% from the 2008 levels. In our higher salary markets, this means the starting salary will be $130,000.
In addition, we will lower the chargeable hour expectations for first year associates in the U.S. to 1,700 for their first year, after which it will revert to the standard 1,900 level. This will allow the new associates to spend more time on training and development in their important first year. As I hope you appreciate, the recent CareeRS rollout likewise reflects our commitment to help you – our existing associates – develop to your fullest potential.
We have no plans for any further structural reduction of associate salaries. In the U.S., we plan to announce any individual salary changes in February at the same time as we announce 2009 bonus decisions. That way, we will have more complete data on both firm and individual financial performance for 2009. Any individual salary adjustments will be retroactive to January 1. Associates in France and Germany will receive 2010 salary and 2009 bonus determinations at the same time as the U.S. For London, Greece and Middle East associates, 2009 bonus decisions will be communicated in February, and the next salary review will occur as customary effective July 1. We will determine starting salaries for newly qualified associates in the London office in the normal course of business in 2010.
We believe the changes to the billing rates and the starting salaries we are announcing today further demonstrate that we are focused on our client relationships and listening to our clients. Thanks to all of you for your hard work and your outstanding service, especially during this difficult year. If you have any questions about today’s announcements, please feel free to contact your Practice Group Leader, your Office Managing Partner, Nicky Dingemans, or Mike Lynch.
Reed Smith Cuts First-Year Salaries, Billing Rates by 20 Percent [Legal Intelligencer]
Earlier: Reed Smith Joins the Attack on Lockstep

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