One of the most critical issues facing law firms today deal with associate compensation. Law firms created the problem by driving salaries up by 45% in some cases over a five to six month period, initially in response to the perceived threat from dotcoms, but then in order to remain competitive with other comparative law firms and retain associates. The Internet fueled an associate lust for salary knowledge never seen before in the profession on bulletin boards aptly called the ‘Greedy Associate.’ Now, the smoke is clearing. Many large to mid-size law firms have substantially raised their salaries, with smaller firms providing modest increases. The dotcom threat has diminished following March’s Nasdaq correction. Lately, there seems to be consensus from many large law firms in the press that the increases were too large.
So what can law firms and associates do to better co-exist? Despite the seriousness of the issue, these two groups seldom have a dialogue on this topic. In September separate presentations were given in Pittsburgh, Pennsylvania to law firm management and then to associates on these issues. They were asked to evaluate 18 different strategies being used by firms around the country. Below are some of the highlights from the surveys taken at the presentations. 1
SHOW ME THE MONEY: 86% of associates feel the best way to compensate them is higher salaries, and 94% of those feel strongly about it. The troubling aspect of this result is they voted this way despite following a 15 minute explanation on how increasing associate salaries are harming law firms (diminished profitability), clients (higher legal fees), and associates (more hours and less jobs). Law firms were not as pleased with this strategy although there were differences between firm sizes. Firms with 10 – 50 attorneys (‘Mid-Size Firms”) were extremely displeased with this strategy. Firms of greater than 100 attorneys (“Large Firms”), mildly agreed with this strategy. Perhaps mid-size firms can ill afford to lose money on associates, while larger firms have grown to accept losing money on associates during the first few years.
WORK HARDER: The reaction of some firms to the salary increases was to acknowledge they had made a mistake but that associates would have to work harder to pay off the increases. 2 95% of the Associates surveyed do not agree with this strategy, and 73% strongly disagree. Large Firm associates were almost uniform in condemning this approach. This could indicate the Large Firms are currently putting the pressure on their associates to work much harder. 60% of firm management was generally neutral to this approach, but Large Firm management tends to think it is acceptable to make their associates work harder.
CLIENTS SHOULD PAY FOR THIS: It is not much of a surprise that associates don’t seem to mind this strategy and 76% do not disagree with this strategy. 53% of management was neutral or against this strategy, perhaps nervous by the public outcry in this region from companies who do not want to pay for associate salary increases. If clients don’t want to pay for the increases, then this strategy is problematic no matter what associates and management think.
LET THEM EAT CAKE: Nationally it has been reported that pro bono services are at risk due to rising law firm salaries 4 Both associates and management are in agreement that this is not an area which should suffer: 87% of firms and 86% of associates are not in favor of cutting back pro bono hours. However, in both groups over two-thirds were basically indifferent. The Model Rules of Professional Conduct are clear that attorneys owe a duty of public service. 5 Even with firms and associates in agreement that pro bono hours should not be cut, the culture of maximizing billable hours to pay for salary increases creates powerful incentives for associates to invest all time in billable matters and avoid pro bono work.
WHO NEEDS SUPPORT STAFF?: A Texas survey reveals support staff raises 6 were disparately lower than associate raises. With low unemployment nationally, support staff have numerous job opportunities. Neither associates (81%) nor management (93%) wants to limit support staff raises most likely due to a well-founded fear of losing their staff. Substantial associate raises can’t help but create the perception among support staff that they aren’t valued.
PARTNERS TO PASTURE: A study in Philadelphia noted that many firms have instituted mandatory retirement ages for partners ranging from age 65 to 72. 7 71% of associates did not approve of this strategy; in particular, associates at Large Firms dislike the idea. Perhaps associates at large firms get the most mentoring from senior attorneys, and this group doesn’t view experienced partners as costly overhead. 60% of management is fairly neutral to this strategy. Mid-size Firms are strongly against this strategy, possibly indicating management knows each other well, which humanizes the issue of telling partners they have to retire.
WHO NEEDS FIRST YEAR ATTORNEYS? Some consultants have identified a way to quickly boost profits by eliminating money-losing first year attorneys. 8 62% of associates were pretty neutral to this strategy. 73% of management was not against the idea and Mid-size Firms strongly support this strategy. It could be those firms feel the pressure of the salary increases more than larger firms and can’t carry the losses junior associates generate.
DON’T INVITE AS MANY ATTORNEYS TO THE PARTY: Extending partnership tracks is a strategy widely accepted among two-thirds of the Amlaw 100. 9 86% of management is basically neutral to the strategy, with Mid-size Firms showing slight approval. However, 95% of associates do not approve of this approach.
MAKE MORE OWNERS: In contrast, some entrepreneurial firms are making partners sooner. 10 Their view is ownership makes entrepreneurial attorneys less likely to leave. Just over half of the associates expressed approval of this strategy. Why associates do not overwhelmingly approve this seemingly pro-associate strategy could mean either they don’t see benefits from partnership or they are not looking to make partner. 87% of management was generally neutral to this idea, with only firms between 51 – 99 attorneys (“Large Mid-size Firms”) mildly approving the strategy.
OUTSOURCE SOME ASSOCIATES: The use of contract attorneys can have a substantial impact on a firm’s bottom line, make the firm more flexible for good and bad times, and enable firms to make intelligent hiring decisions based on job performance. 11 As we might expect, 87% of management is not opposed to contract attorney usage; more surprising, perhaps, is that 71% of the associates are also not opposed. Furthermore, surveys show corporate clients overwhelmingly approve of this strategy and recognize the efficiency outsourcing brings to companies. 12 Associates, management and clients approve of this tool. Firms should utilize outsourcing more to control costs and increase profitability.
LESS MONEY FOR LESS TIME: 13 Some firms have offered to keep salaries constant in exchange for less billable hours. 62% of associates were supportive of this idea, with Large Firm associates strongly in favor of this. This indicates Large Firms are working their associates fairly hard. Management has not formed a consensus yet: their responses were scattered, with 40% approving and 47% disapproving.
PAY FOR PERFORMANCE: Bonus pools are a way many firms are attempting to make increasing salary costs more variable. 14 In good years, associates are handsomely rewarded without breaking the bank in slower years. 79% of associates are not opposed to this strategy, with only Large Firm associates expressing some concerns. In comments, some associates noted bonus plans are more prone to being manipulated by management and often times they can not control how much they work.. 60% of management was in favor of this strategy, with all of the large firms not opposed. With both sides in favor of this strategy, firms might want to consider being more aggressive with this strategy.
QUALITY TIME OPTIONS: Some innovative firms give their associates the choice of time off instead of money. 15 75% of associates of all firm sizes favor this approach. Management is neutral, but management at Mid-size Firms showed more of a willingness to use this strategy.
UNBUNDLE COMPENSATION: One area consultants point to as outdated at law firms is measuring associates based on their years since graduating law school. 16 Both associates (65%) and management (80%) agree that rewarding attorneys based on performance rather than graduation date makes sense. The only group that did not approve of this strategy is Large Firm associates, who make high salaries and have less incentive to change salary structures.
DIAMOND STRATEGY: Some large firms find it is profitable to hire experienced attorneys who are not rainmakers. 17 This is strategy surprisingly is agreeable to both associates and management: 95% of associates and 93% of management are not opposed to the Diamond Structure strategy . Associates may feel less threatened by experienced laterals because they perceive these attorneys as less of a threat in taking a partner slot. However, because both sides are amenable to it, it makes sense for firms to consider this strategy.
HIRE MORE NON-LAWYER PROFESSIONALS: Akin Gump has come out in support of this strategy. 18 This was given low marks by associates (67% did not approve) compared to management (64% approved) for obvious reasons. It creates less need for associates by finding other less costly means to get associate work done.
STOCK-EQUITY OPPORTUNITIES: A recent ABA Ethics Opinion legitimizes firms accepting stock from clients in exchange for legal services. 19 Firms like Wilson Sonsini in 1999 earned millions of dollars from stock. In fact, their three largest IPO’s in 1999 resulted in $2 million in profits per partner. 20 63% of associates think this is a good idea, but 67% of management does not support this strategy. Because most firms do not have a transaction practice that can support this strategy, it is not practical for most firms.
RETENTION PLANS: The salary increases came into being in an effort to retain associates in Silicon Valley. That being said, both 67% of associates and 93% of management clearly believe retention programs are key components in solving the salary issue. Opinions were strong here: of those who agreed, 64% of associates strongly agreed, as did 69% of management. There are no boilerplate answers when it comes to retention programs. What is needed is an understanding of what associates seek and a strategy to deliver these needs. Common areas identified in retention strategies are: 21
(1) reducing billable hour requirements, (2) improving mentoring/ombudsmen, (3) provide feedback to associates and peer reviews of partners, (4) allocate work to all associates, (5) better training, (6) higher quality assignments, and (7) describe the firm’s objectives and compensation structures.
We believe this comparative survey provides some insight into what management and associates feel are the best ways to rationally manage the compensation hurdles facing law firms and their employees. Retention strategies are the clear winner from both managements’ and associates’ perspectives. Both parties also greeted compensation strategies such as bonus programs and unbundling compensation with some acceptance. In addition to how firms compensate, whom they should hire also received some feedback. Hiring staff attorneys under the Diamond Structure received some favorable responses. Firms may follow the lead from other professions becoming more flexible by hiring more contract attorneys and less associates. Other strategies studied above may not have received universal support, but may be correct for certain firms.
The bottom line is the old way of increasing salaries based on what other firms do has created an unhealthy economic environment for the legal community. Rather, firms need to identify the results they wish to achieve and become creative in creating incentive programs to achieve those results.