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Associate Compensation in the New Era

2011 MLS Salary Grid

2011 MLS Salary Grid (Photo credit: Bernhardt Soccer)

A long, hard look at associate compensation is in its infancy and long overdue.  There is no cosmic obligation that firms universally set the gold standard at a $160,000 starting salary nor is there a divine imperative by associates to demand compensation at that level.  Law firms have received no exemption from compliance with the laws of supply and demand. Nor are they exempt from basic concepts of basic economically rational behavior.

At the outset, let’s recall how law firms got to the gravity defying $160,000 plus bonus starting salaries.  In the last decade, as investment banks became increasingly profitable and the pool of bright B-school graduates was limited, investment banks turned to top law school graduates for fodder.  Recent law school graduates of well ranked schools were then certainly bright enough to perceive that their own economic opportunities, both short term and long term, was far rosier in the investment banking world.  Top ten law firms, upped the ante and spiraled starting salaries to the $160,000 plus level. The next tiers of law firms, forgetting that their business base was largely middle market thought that merely because they had increased in size and paid rent in major metropolitan markets they were cut of the same cloth as traditional top ten firms.

If royalty was cloaked in red velvet and astronomic starting salaries were part of that vestment, these newly large firms thought that they would also be viewed as part of the regal clan by including this vestment, ignoring their somewhat humbler roots.  So, the legal profession went in to a bidding war with the investment banks for this talent.  We’ve now seen the virtual death of the investment banking industry and, guess what?  The legal profession won the bidding war.  But, what it won was the booby prize; the investment bank world has largely died.  The competition for the high priced talent died with them.  And, law firm clients were no longer interested in financing either the no longer existing bidding war or the cost of training young lawyers.  Rather, the primary focus is on efficiently deployed legal expertise, understanding the client’s objectives and budgeting.  I have scoured the curricula of over 100 law schools and none offer coursework in these vital areas.

Rather anomalously, another driver in maintaining logic defying extraterrestrial associate compensation levels are the various blogs in which so many associates happily and anonymously share gossip,  divulge confidential information about their law firms and whine about salaries.  These blogs have assumed a jarring force in the profession.  Assuredly, many, many lawyers and professionals either sneak peeks at these blogs or follow their titillating tales with religious regularity, but basing important business decisions on these blogs is as rational as making life decisions based on the tabloids piled at supermarket checkout stands.

It certainly has not escaped our attention that in the waning weeks of 2009 and upon the dawn of the new decade, some firms announced bonuses and the unthawing of salary freezes.  Many of these announced bonuses were cosmetic, as were the thawing of the freezes. Some of the bonuses as well as increased salaries were conditioned upon realizing minimum annual hourly billing; an unrealistic achievement for many associates who are both honest recorders of time and simply haven’t been assigned enough work to get to the brass ring. Some of the “unfrozen” salary and concomitant cosmetic raises now also include a “holdback” of material portions of annual compensation, a neat way to also preserve capital and at year end, microscopically scrutinize performance, giving the firm the option to decline paying holdbacks because of purported failures to pass muster.  In some cases, the unthawing of salary freezes came with an elimination of lockstep compensation.  Thus, some firms could give the appearance of joining the elite in the AmLaw and simultaneously deal with associate compensation in the ever changing black box we witnessed in early 2009.  The ultimate results in continued declines of associate morale will again reoccur.  (Associate job satisfaction is not something not to be trifled with: http://kowalskiandassociatesblog.com/2010/09/13/associate-job-satisfaction-why-law-firms-should-care/ ). Since early 2009, we have been strong advocates of complete transparency on associate retention and compensation issues, including involving the associates in the factors being considered by management in making these crucial decisions.   That view has not changed.

In the case of some of the early 2010 announcements of unconditional thawing of previous freezes and the resumption of bonus payments by a small number of law firms which are simply top ten wannabes,  this is simply a short sighted error in judgment, with long term adverse consequences.  It is a repetition of previous lemming-like conduct, for which the financial penalties will be the same experienced in 2009.  As George Santayana famously said in 1905, “those who don’t learn from the past are condemned to repeat it.”  Or, as psychologists are wont to say, the repetition of the same acts expecting different results is the ultimate definition of insanity.

The year end associate public bonus announcements demonstrate a lack of a grasp to reality.  Surely, rewarding those who have contributed to a firm’s year end success, whatever that may be, is certainly commendable.  But, fixed amount bonuses make no economic sense.  Munificently rewarding those who are simply still breathing at year end and survived the scythe of layoffs and crowing about that grandiosity publicly also shows an indifference to client concerns that “lawyers are making too much money,” a sentiment we now know widely exists among clients.  Such bonus awards, if appropriate, should be granted privately during personal year end reviews. Associates should be told during year end reviews why he or she received or did not receive a bonus. It defies credulity that each surviving associate at each level of seniority performed and contributed equally to the firm’s year end results is simply absurd.  No firm would reward partners an equal bonus, based only on seniority.  Rewarding associates in this public fashion not only makes no sense but serves to throw more sand in client’s eyes. No other business awards annual bonuses and salary increases by simply taking an employee’s pulse, measuring continued brain wave activity and simple confirmation of continued life at year end.

Rewarding additional bonuses based on yearend total hours billed is plainly pernicious. Dr. Atul Gawande, the renowned surgeon, MacArthur Fellow and New Yorker journalist has poignantly pointed out that paying physicians on a simple fee for services basis only provides economic inducements for physicians to order and provide more services, needed or not and certainly does not provide better medical care or better medical results. Compensating associates (and indeed law firms as a whole), based on hours billed breeds only more hours, not better results. When the economic risk is passed on to the law firm, as sea changing alternative billing arrangements require (http://kowalskiandassociatesblog.com/2010/08/24/alternative-fee-arrangements-lesson-ii-of-the-primer/ ), closer scrutiny of hours billed by the firm will be the only economic result; improved or enhanced legal services will not necessarily be achieved.  The firm will more carefully consider whether a particular item of research is really needed, whether a deposition of a particular witness is really necessary.  Clients now really understand this; firms too often just don’t get it.

And, let’s say openly what we have been afraid to say publicly for a generation or more:  When you base associate compensation on hours billed or bonuses on reaching higher plateaus, you simply encourage cheating at worst and exaggeration at best. A reading of http://kowalskiandassociatesblog.com/2010/09/14/222/ is instructive.   If the associate is performing well and he or she is not billing sufficient hours, it is the firm, not the associate who is at fault. It is the firm’s obligation, not the associate’s obligation, to fill his or her plate, with due consideration to the performance of the associate.  Our deep and dark dirty little secret is that compensation and bonuses based on hours billed breeds a culture of dishonesty.

While statistics sometimes make the eyes glaze over, it is significant to quickly review some significant raw data about young associates and future recruiting: The recent publicly acknowledged round of layoffs of associates in 2009 at AmLaw 200 firms alone numbered in excess of 5,000.  That number does not include so called “stealth layoffs,” that is, lawyers who were let go because of accelerated or routine annual reviews, for which the “bar” was set higher. That number does not include layoffs for firms of 100 or more lawyers, not members of the hallowed AmLaw 200.   Nor does that number include partners or counsel who were let go; greater discretion and judgment kept these partners from wagging their tale of woe to the nearest blog. All told, we believe that approximately 27,000 lawyers are now unemployed who previously worked at firms of 100 or more lawyers.

And, the pipeline keeps spewing out more lawyers. Approximately 40,000 students graduate each year.   At the height of the hiring boom in 2007, AmLaw 100 firms hired a total of 10,000 new graduates. The estimated total number of recent graduates hired by firms of over 100 lawyers during that same top of the curve is estimated at approximately 27,000.  Accordingly, the total available labor pool for 2010 will be more than 75,000 lawyers – new graduates plus currently unemployed or underemployed lawyers.  Accordingly, if miraculously the demand in 2010 equals the demand that existed at the previous zenith; there are still three times as many available applicants as openings. We must also add to this calculus that headcounts at AmLaw 200 firms declined by about 5%. Sadly, we know that miracles seem to be in rather short supply.   2011 will add at leat 45,000 new graduates to this pool.

The incredibly long lines appearing in 2009 before the windows reading “hiring today” tells the story. Forty thousand applications were submitted for 1,200 federal clerkships. Hundreds of applicants apply for each lawyer posting appearing on www.usajobs.com. And that’s just federal jobs. Anecdotal evidence suggests that there are more than 30 applicants for each government job; the openings range from assistant counsel at a municipal waste district to the hallowed halls of the Justice Department. Six applications are made for each pro bono position. Imagine that:  six people competing for a job that offers no compensation.  The Manhattan District Attorney’s office took on so many pro bono applicants this year that it didn’t even have enough folding chairs, let alone desks, to seat them. Aspiring lawyers, $150,000 or more in debt are sitting on the floor trying to work for free to enhance their resumes in the hope of landing a paying job when the smoke clears. One bright small note is the passage of legislation which provides for law school tuition loan forgiveness for lawyers employed in the public sector ( http://legaltimes.typepad.com/blt/2010/09/doj-to-finally-give-government-lawyers-loan-relief-.html )

We have all heard a bit too often recently that employment is a lagging indicator in a recovery from a recession. But, your blood may further chill upon learning the fact that job recovery for the legal profession following a recession is one of the most significant and longest lasting indicators.

While I feel a need to apologize for numbing you with these numbers, these rather ugly statistics should play an important role in fixing associate compensation, deployment of associates and the recruiting process as a whole.

As an aside, I have frequently observed over the last year that if law school deans who recruit college graduates to enroll in law schools were held to the same standards of disclosure as issuers or underwriters of securities, many, if not most, would now be housed by the Federal Bureau of Prisons.

My own guess is that economic realities will compel a continued downward spiral of starting salaries; tiering of associates; moving associates up through the tiers only upon their mastery of important client demanded skills.  Most significantly the powerful Association of Corporate Counsel is now publicly ranking law firms by clients on a scale of one to five for six objective criteria. Thus far, 1,800 evaluations have been made of 600 law firms. Associates will be necessarily evaluated on their mastery of the ACC identified skills.

Nor does it make sense given the current state of affairs to maintain a bench full of young lawyers to be available for that call from the Big Client for a major matter.  Rather, with the streets teeming with well educated and often well trained lawyers, more associates will be engaged directly by law firms on a project by project and as-needed basis, subject to oversight by  project managers and quality control systems and personnel. Less than voluntary flex time and part time lawyers will be more common.  These lawyers obviously will be paid less and will not receive benefits.  The increasing use of temporary help, as opposed to full time employees, across all industry lines was a trend noted and reported on December 19, 2009 by the United States Bureau of Labor Statistics.  And, given the vast army of such lawyers pounding the streets, as I previously described, the necessity to use contract lawyer agencies to effectively act as distributors of these resources and paying them a distributor’s profit, the efficient law firm will retrofit its own recruiting personnel, no longer engaged as deeply in on campus recruiting and deploy them to find these project lawyers.  Some number of these project lawyers will shine and be offered full time employment.  Most others will return to await the next casting call.

Law firms in the coming months and years, are going to be dragged, perhaps kicking and screaming, back in to basic economic norms, including laws of supply and demand, rational compensation systems, merit based increases, leaner staffing, more efficient delivery of legal services and compliance with client demands.

It’s a brave and scary world out there.  But virtually every other member of the business community has already learned to survive and often thrive adhering to basic economic norms.  The fallout to the legal profession is ineluctable.  Associate compensation will continue to scale down. Numerous lawyers will be day laborers. Many lawyers now in the profession will never again work as lawyers.

© Jerome Kowalski, January, 2010, All Rights Reserved.

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