Pay Freeze: Law firms hold line on expenses in tough economy

By Peter Vieth
Published: February 23, 2009

Law firm associates can plan on the same household budgets this year – Virginia law firms are holding the line on associate salaries, according to law school placement officials.

The trend is nationwide. More than a dozen firms have said they will not raise associate pay this year.

“They’re freezing, which is the only rational thing to do in this environment,” said Tom Clay, a partner at legal consultant Altman Weil Inc.

Not that a salary freeze is likely to produce a lot of grumbling from junior attorneys. As William and Mary law school Associate Dean Robert E. Kaplan noted, “I assume it would be a preferable option to being laid off.”

In the wake of the largest single round of law firm layoffs ever observed in this country on Feb. 12, a hold on raises for associates is hardly surprising. But it is unprecedented. “I cannot recall any time in recent memory that this has happened,” said Kaplan.

“It’s an overall change in climate. Law firms are facing reduced needs and the possibility of not having enough work for associates to do,” Kaplan added.

Silver linings are hard to find. The salary level “certainly isn’t going to go up anytime soon,” said U.Va.’s W. Stevenson Hopson IV, Senior Assistant Dean for Career Services.

Hopson remarked last week about a phone call he had just received from a laid-off associate at a prominent New York law firm. “It is truly amazing. I never would have thought this was ever going to happen – but it did,” he said.

What makes it more remarkable, Hopson said, is that employment statistics for U.Va.’s law school class of 2008 were the best the school had ever had.

“Who knows what next year is going to be?”

For now, the going rate for new associates at big firms in Virginia is near $160,000, according to Hopson. For smaller firms, $80,000 to $90,000 is common.

Francis B. Burch Jr. is global board chairman of DLA Piper, which cut free 80 associates and 100 staff earlier this month. He said the economy’s nosedive means firms are cutting back everywhere. Associate salaries aren’t exempt, he said.

“We think demand will continue to soften and we think that means that revenue may be flat or down, and we think it’s important to control expenses in every way we can, and a significant part of a law firm’s expense is represented by salaries,” Burch said. “We’re cutting out everything that we can and trying to hold flat everything we can.”

Lawyers with jobs are hardly facing starvation. James G. Leipold, executive director of NALP: The Association for Legal Career Professionals, pointed out that the firms freezing salaries are already paying their associates very, very well.

But, he said, that won’t placate students who are coming out of law school with $180,000 worth of debt and living in expensive cities, where $160,000 “doesn’t go that far.”

Deborah M. House, vice president and deputy counsel of the Association of Corporate Counsel, said she has not heard much about the salary freezes, but she welcomed the news.

“I think that freezing salaries would be a good move,” House said. “In fact, associate salaries should be melted before being frozen.”

In an environment where corporations are laying off in-house lawyers and scrutinizing outside legal costs, it’s just not appropriate for associate salaries to go any higher, she said.

“At this time, in-house counsel are having their salaries frozen or in-house counsel are losing their jobs, and so the continuing increase of associate salaries in circumstances like that where legal departments are negative or at least flat are [not] a good move on the part of law firms,” House said.

When associate salaries do go up, corporate clients get stuck paying ever-higher rates for attorneys barely out of school, she said. In this economy, in-house lawyers are telling their outside counterparts that they won’t stand for further increases.

Given that pressure, many firms have no choice but to curb associate salaries this year, said Clay, the consultant.

“In light of clients out there just screaming about rates, telling you, you can’t use first- or second-year lawyers, looking at freezing pay and/or bonuses makes a lot of sense,” he said.

Still, Leipold said that firms will be under pressure to raise salaries in 2010 or 2011.

He also said firms will have to address another problem: When the new associates start this fall, they will be making the same salary as lawyers one year ahead of them, which is against recent tradition.

A report put out last month by consulting firm Hildebrandt suggested that firms consider doing more than just freezing associate pay. A broader strategy should include a move away from lockstep salary increases that reward seniority more than skill, the report says.

“But salary freezes – however desirable in the present economic crisis – are not a long-term solution to the problem,” the report said. “Firms that have not already done so should seriously consider modifying their associate compensation structures to allow a substantial portion of compensation to be tied to individual performance in support of the firm’s goals and strategy.”

Clay said he expects more firms to freeze associate pay. He said the big question, though, is whether any will actually decrease it.

“I wonder … whether anyone’s going to be brave enough to ratchet it back,” Clay said.

Virginia Lawyers Weekly

Pay Freeze: Law firms hold line on expenses in tough economy

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