Law Firms Slash First-Year Pay
Law firms including Cravath, Swaine & Moore LLP and Skadden, Arps, Slate, Meagher & Flom LLP cut year-end bonuses for first-year lawyers by as much as 71 percent, part of a plan to keep client costs down and ride out a recession that has forced structural changes in the industry. Bonuses dropped for first-year associates at many toptier New York firms while staying the same or increasing for more experienced associates. Bonus reductions, along with overall pay cuts, signal a diminished role for junior lawyers at the larger U.S. firms, said consultant Bruce MacEwen. The industry wide move to cut pay is “reflecting, frankly, the low value clients place on junior associates,” MacEwen, who is based in New York, said in a phone interview. Facing a slowdown in work due to the financial crisis, law firms fired thousands of associates this year and last, forced new hires to delay starting dates and cut hours in exchange for reduced salaries. Demand for legal services dropped 6.8 percent in the first nine months of 2009 compared with [2008], according to Citi Private Bank. New York firms including Cleary Gottlieb Steen & Hamilton LLP, Sullivan & Cromwell LLP, Cravath, and Skadden Arps cut seniority-based bonuses from $17,500 to $5,000 for first-year associates. Other firms, such as San Francisco–based Morrison & Foerster LLP, Reed Smith LLP in Pittsburgh, and DLA Piper LLP in Chicago, cut starting salaries for first-year associates from $160,000 to as low as $130,000 this year. Firms in cities including New York, Washington, and San Francisco had adopted $160,000 as the industry standard beginning in January 2007. Cleary’s managing partner, Mark Walker, said the cuts aren’t a reflection on the value of young associates at his firm. The best are traditionally offered partnerships after spending eight years as salaried associates. “The young lawyers today are the senior lawyers five years from now,” Walker said. Jeffrey Grossman, of the Legal Specialty Group at Well Fargo & Co., said U.S. law firms are cutting associate pay to temper their decline in profitability. Even partners are taking home less, he said. Today’s economic justification, however, may reap rewards for law firm bottom lines tomorrow when revenue increases. “It will be a future benefit,” said Grossman. “It will change the cost structure for future years.” An additional consideration in paring pay, the law firm consultants said, is the need to address increased pushback from corporate clients seeking reduced hourly billing rates. Rates for the least experienced attorneys typically range from $250 to $350 an hour, MacEwen said, spurring some clients to complain they are paying top dollar for the training of young lawyers. The perception has existed for years and “bubbled to the surface” during the recession, Grossman said. The bigger firms—which often move as a bloc in setting pay—still recognize they need to nurture top young lawyers. As a result, Grossman said, some have reconfigured compensation to reward high performance. Orrick, Herrington & Sutcliffe LLP, based in San Francisco, this month said it would eliminate bonuses for first-year associates, while keeping salaries the same. It instituted a new system in which they get raises based on performance rather than seniority. The changes were made to align pay with performance and client needs, said Orrick CEO Ralph Baxter.Ouestions1.based on the information given what issues have law firms considered in their decisions about their pay structure.2.How would you expect first year lawyers to perceive the fairness if the pay decision described in the case?3.How might this change be carried out to ensure happiness in the US firms4.In case it is lighted that us law firms instituted a new system in which lawyers get raises based on performance rather than seniority. Explain any four advantage of this?5.Explain any four reasons for the importance of total reward in organizations ?