Tech Downturn, Economic Uncertainty
Taking Pressure Off Salaries
The dot-com meltdown and uncertain economy are putting the brakes on the sharp run-up in first-year associate salaries seen last year.
San Francisco-based Brobeck, Phleger and Harrison LLP, which was among the first to boost salaries last year, recently said it plans to up its basic first-year salary again,from $125,000 to $135,000. But the rest of the profession is not rushing to follow suit.
“We will not be following Brobeck’s increases,” said Clifford Frieden, managing partner of Costa Mesa-based Rutan & Tucker LLP.
Gary Singer, managing partner of Los Angeles-based O’Melveny & Myers LLP’s Newport Beach office, said, “We haven’t made a decision. We’re looking at what the market is doing.”
Singer added: “I think Brobeck is out there ahead of the curve.”
And Bill O’Hare, managing partner of the Irvine office of Phoenix-based Snell & Wilmer LLP, said his firm would not make a move before fall, adding that Brobeck’s announcement “was mildly surprising to many,” given the changed economic situation from last year.
Among Brobeck’s Bay area peers, Pillsbury Winthrop,newly minted in the merger of Pillsbury Madison & Sutro and New York-based Winthrop, Stimson, Putnam & Roberts,also raised its first-year associate salary to $135,000. But Palo Alto-based Wilson Sonsini Goodrich & Rosati said last week it intends to hold the line.
“We announced our salary raises first intentionally, to be the market leader,” said Kathlene Lowe, managing partner of Brobeck’s Irvine office.
Last year, first-year associate salaries,a benchmark for what firms pay non-partner attorneys,shot through the roof. Many firms raised their salaries for fresh-out-of-law-school attorneys from $100,000 or less to $125,000 or more.
“Some went as high as $150,000 in California,” Lowe said.
The first-year frenzy started in Silicon Valley in late 1999, spread quickly to San Francisco and then New York via Brobeck and some other bi-coastal firms. It eventually engulfed most other major legal centers, including Los Angeles, Boston, Houston and Chicago.
The reason for the run-up was a confluence of factors pushing up demand for attorneys:
—A booming economy that was generating more work for law firms across the board, but especially in intellectual property, securitiie work and mergers and acquisitions
—Competition from corporate legal departments, especially in the burgeoning tech sector, and from dot-coms, which often hired lawyers as managers.
—Competition from financial services firms, especially accounting’s Big Five, that are building so-called interdisciplinary practices even as they push for the right to offer full legal services in the U.S., as they do in Europe and Asia.
In addition to the base salaries, associates at some firms can earn substantial bonuses based on hours billed and other factors. At Brobeck, associates can receive bonuses of up to $35,000, although most are well below that.
A second wave of compensation competition swept through New York firms late in the year, with the awarding of bonuses that at one firm reached $75,000, although it is not known (and very doubtful) whether any first-year associates earned that prize.
The spike in associate compensation, of course, put a lot of pressure on law firms’ bottom lines, threatening partners’ take-home pay. Many firms raised rates last year, and there was a renewed focus among managing partners on billable hours.
“There’s more sensitivity to ensure associates remain productive,” said Rutan & Tucker’s Frieden.
Although Snell & Wilmer’s O’Hare would not chalk it up to the associate pay raises, per se, he said his firm is paying “more attention to productivity and how we’re handling money.” It increased hourly rates last year, he said.
“You just look more carefully at these things as costs increase,” O’Hare said. “It forces you to be more focused and make sure you’re being as productive as you can be and charging market rates.”
Even if the economy slows, lawyers are expected to stay in demand. But at least this year, salary pressure generated by the dot-com bubble and heady economic growth of the past few years has been relieved. And that, many believe, should be enough to keep any increases to moderate or even minimal levels.
“I expect things to level off, but not go down,” Frieden said.
Citing “the circumstances that created (the spike),the torrid pace of the dot-coms at that time,” Frieden said, “I would think that the change in the marketplace would take some of the pressure off.”
At O’Melveny, Singer said he is seeing less demand for attorneys from corporate departments, possibly because of companies’ wariness about the direction of the economy.
“I don’t know if they’re cutting back or just being more restrained in their spending,” he said, “but a lot of people are concerned going into this new year.”
Even Brobeck’s Lowe,her firm’s recent move notwithstanding,acknowledged that it’s a different environment this year.
“It’s very unlikely that we will see major firms implementing significant salary increases,” she said. “It’s a more uncertain market.” n
