Over the course of 2009, we covered attempts from a number of firms to replace lockstep associate compensation with a “merit based” compensation system. We have seen firm after firm (and consultant after consultant) claim that clients really care about how law firms pay their associates. And who can disagree with a term like “merit?” DLA Piper put it this way in its defense of its new, merit-based system:
At its core, this new system forces differentiation and rewards outstanding performance.
Right now, merit-based compensation is certainly winning the branding war against lockstep. There are certainly very good arguments in favor of merit compensation.
But there are also good arguments in favor of lockstep. There are reasons why lockstep is still the choice of firms considered to be the best in the country. If merit-based compensation is just a thinly veiled attempt to cut total associate compensation, that’s one thing. But let’s not forget that lockstep has some serious upside for associates, partners, and yes, clients.
There has been a lot of talk about DLA Piper’s new merit based compensation structure, and a lot of that talk has not been pleasant. Associates are pretty bummed that they’ll be starting at $145,000 with 15% of that salary deferred until the end of the year if they hit their performance marks. We noted those concerns earlier this month.
But there is a memo going around the offices of DLA Piper. It appears to be unsigned, but tipsters report that the memo is something that DLA management put together. It offers a very different viewpoint on the new DLA structure.
Whoever made the memo, it’s a full-throated defense of the firm’s decisions. Let’s take a look after the jump.
Much of the recent talk about Hogan & Hartson has focused on their merger with Lovells. While transatlantic mergers thrill the imagination, back on the ground in the States, people are still concerned about their paychecks.
Hogan has long had a two-track salary system. The higher track paid market salary with the expectation that associates bill 1950 hours. The lower track paid less and had an 1800-hour billable expectation. Associates traditionally got to choose which track they wanted.
But Hogan turned its system on its head last spring. In April, Hogan placed associates in the lower salary track if they weren’t on target with their hours through the first quarter. The firm promised to pay the money back at the end of the year if associates did hit 1950 hours.
Well, here we are at the end of the year, and Hogan & Hartson is making restitution. And it’s paying a bonus. And it’s unfreezing salaries (although it’s not giving its people a “true-up” to where they would have been without last year’s salary freeze).
The Hogan salary structure for its two tracks, plus discussion, after the jump.
As firms start to unfreeze salaries, all in different ways, we at Above the Law have started to notice a lot of confusion about what these unfrozen salary structures look like. We’ve been seeing a lot of comments and emails like this one:
wtf is a true up vs. a thaw…dude…not everyone reads this blog 24/7…these are critical details that you are leaving up to assumption that the reader knows wtf nerd language you are talking about…
To help clarify things, we have put together a little chart. To make things easier, we have looked at the salary of a fictitious soon-to-be third year from the incoming class of 2007. It seems appropriate to look at this class of people; since they are about to enter their third full year of work, they’ve experienced the recession in all of its glorious forms. And looking at one class’ salary over the years is less confusing than looking at everybody’s salary at every level.
To refresh your memory, here’s what our class of 2007 associate has been paid at a top tier firm that didn’t freeze, year-by-year. A person working at Davis Polk, for instance: FIRM THAT NEVER FROZE
’07 (stub-first year) = $160K
’08 (full first year) = $160K
’09 (second year) = $170K
’10 (third year) = $185K
But not everybody can work at Davis Polk (or someplace similar). How the other half lives after the jump.
The Day That Lockstep Died
(to the tune of “American Pie”)
My, my, pushin’ lockstep aside,
They say merit — do they mean it? ‘Cause my raise has run dry.
But top-tier firms are not inclined to comply:
Sayin’, we’re not sure if this s**t will fly; we’re not sure if this s**t will fly.
What started out as a trickle is turning into a flood. Orrick and DLA Piper have already announced new associate compensation models for 2010 — and now WimerHale wants in on the action. The firm announced the change in a memo to all of its associates:
The Firm has decided to transition to a merit-based compensation program for associates and counsel in our U.S. offices. This afternoon we will hold local office meetings to discuss the details with you followed by an open forum for questions. Shortly you will receive a calendar invitation for this meeting, but first we wanted to provide you with background on the plan, the timing, and our thought process.
Before we lay out the details of the new model, it is important to recognize that this step is one that falls within a much larger framework. As you have heard us say before, whether at the State of the Firm address or in smaller group settings, the traditional structure and method of doing business for law firms is changing and needs to change.
The plan will be phased in through 2012 — but why wait until 2012 to address labor costs, when you can freeze associates’ salaries for 2010? Today’s WilmerHale announcement includes the news that the firm will be freezing associate salaries (except for second-year associates, who will be bumped up to $165K).
Additional details on the new compensation scheme and the full memo, after the jump.
The artifice of the slurpee salary freeze and the “temporary” salary cut can be put to rest. As long as you are not doing keggers with the firm Kool-Aid, you already know that Biglaw will keep associate salaries depressed for as long as they can. It’s not hard to see where this is going, as Am Law Daily reports:
“If you do the math,” says Steven Davis, chairman of Dewey & LeBoeuf, “associate compensation is coming down across the board.” …
“I lean much more in the direction that this is not a blip,” says Dewey’s Davis. “In the medium term, we’re seeing, and will continue to see, a paradigm shift” in associate compensation. (Dewey, interestingly, hasn’t announced cuts in compensation or in bonuses, though it has sent dozens of 2009 first-years on leave with a stipend.)
That last parenthetical isn’t entirely forthright. Dewey hasn’t announced bonuses yet. If the firm follows Cravath or S&C, that will represent a “cut” in bonuses from last year (to say nothing of two years ago). If Dewey doesn’t follow the market and instead pays what it did last year, I’ll strip naked and run through the streets screaming “I am TTT! I am so TTT!”
But the general point — the one about basic “math” — is exceedingly obvious.
The only open question is whether firms will keep the deflationary salaries on lockstep, or if they’ll move towards a system that rewards people based on still undefined “performance metrics” instead of experience and billable hours.
I’m a senior associate at a large NYC law firm — I’m hearing rumors that some large law firms who have frozen salaries (which unfortunately includes my firm) are preparing for the big thaw — have you guys heard anything to that effect?
Ha. Haha. Unfreezing? Yeah. Let me just ride my unicorn down the streets of El Dorado and see what there is to see.
At an all associates meeting today, Orrick, Herrington & Sutcliffe revealed its much talked about new associate compensation structure. Starting in 2010, Orrick will be moving away from lockstep in a big way.
Essentially, Orrick has separated associates into three classes: associates, managing associates, and senior associates. Advancement from one level to another will be based on merit — not time served at the firm.
The biggest news is that starting salaries are going to remain at the $160K level. Orrick wants to recruit and compete for top talent. The firm isn’t using the move away from lockstep as an excuse to cut first year pay.
And the firm will still pay the prevailing market bonus. In fact, the firm will pay the market bonus, plus a little extra to its highest performing associates. The goal appears to be giving their superstar associates a big reward for good work, instead of reducing costs on the back of associate compensation.
Check out the new salary structure chart from Orrick after the jump.
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.
Have you noticed that whenever there is a story about the long-term future of associate salaries, there is always a quote from somebody at Altman Weil, the law firm consultancy? And have you noticed that their quotes are often advocating deep cuts in associate pay?
The latest example of this curious phenomenon appears in the Fulton County Daily Report:
Altman Weil’s Oct. 27 program, called “Leverage, Lockstep and the Changing Associate Model,” was for law firm clients.
Altman’s James D. Cotterman, who advises firms on compensation, said associate pay did not drop enough in the recent round of cuts at the nation’s big law firms, which included Atlanta’s largest firms.
Cutting pay from $160,000 to $145,000 was only “about half of what was needed,” said Cotterman. The starting salary at big firms in New York, Washington and Los Angeles was $160,000 before the pay reductions that started last spring.
Cotterman said a $15,000 cut does not make a significant difference in “changing the value equation to clients.”
“They probably should have set pay back a decade, to 1998. That’s what I was expecting,” he said. “This story may not be over yet.”
I don’t see James D. Cotterman advocating that profits per partner go back to 1998 levels. I wonder why?
If you are considering a virtual law practice, you know that many of today’s solo firms started that way. But why are established, multi-attorney law firms going virtual?
Many small firms are successfully moving part—or even all—of their practice to a virtual setting. This even includes multi-jurisdictional practice spanning several states and practice areas, although solo and small partnerships are still the largest adopters of virtual law.
Can you do the same? The new article Mobile in Practice, Virtual by Design from author Jared Correia, Esq., explores how mobile technology bring real-life benefits to a small law firm. Read this new article—the next in Thomson Reuters’ Independent Thinking series for small firms—to explore how a mobile practice:
Reduces malpractice risk
Enables you to gather the best attorneys to fit the firm, regardless of each person’s geographic location
Leverages mobile devices and cloud technology to enable on-the-spot client and prospect communication
Transitioning in-house is something many (if not most) firm lawyers find themselves considering at some point. For many, it’s the first step in their career that isn’t simply a function of picking the best option available based on a ranking system.
Unknown territory feels high-risk, and can have the effect of steering many of us towards the well-greased channels into large, established companies.
For those who may be open to something more entrepreneurial, there is far less information available. No recruiter is calling every week with offers and details.
In sponsorship with Betterment, ATL and David Lat will moderate a panel about life in-house and we’ll hear from GCs at Birchbox, Gawker Media, Squarespace, Bonobos, and Betterment. Drinks, snacks, networking, and a great time guaranteed. Invite your colleagues, but RSVP fast, as space is limited.
Ed. note: The Asia Chronicles column is authored by Kinney Recruiting. Kinney has made more placements of U.S. associates, counsels and partners in Asia than any other recruiting firm in each of the past seven years. You can reach them by email: firstname.lastname@example.org.
It’s that time of year again when JDs are starting to apply for 2L summer jobs and 2L summers are deciding which practice area to focus on.
For those JDs with an interest in potentially lateraling to or transferring to Asia in the future, please feel free to reach out to Kinney for advice on firm choices, interviewing and practice choices, relating to future marketability in Asia, or for a general discussion on your particular Asia markets of interest. This is of course a free of cost service for those who some years in the future may be our future industry contacts or perhaps even clients.
For some years now Kinney’s Asia head, Evan Jowers, has been formally advising Harvard Law students with such questions, as the Asia expert in Harvard Law’s “Ask The Experts Market Program” each summer and fall, with podcasts and scheduled phone calls. This has been an enjoyable and productive experience for all involved.