The end of the salary war?

Robert Nelson remembers when New York law firms paid first-year associates more than law firms in other cities around the country.

But then, various law firms began to bid up the starting price for these associates - even in the late '80s and early '90s during the Silicon Valley shortage. When the bubble burst in 2000 and 2001, many firms retracted their higher offerings. But just a few years later, first-year associates again found rapidly rising salaries at national law firms.

"There were some firms that paid a little lower than other firms, but they found they couldn't get the talent they needed, so they had to match salaries," said Nelson, the director of the American Bar Foundation and a professor of sociology and law at Northwestern University.

According to an article published in the Chicago Daily Law Bulletin on May 29, 2007, Mayer Brown was one of the first firms in Chicago to raise its first-year associate salaries to $160,000.

Other top Chicago firms, including Kirkland & Ellis, Sidley Austin and Winston & Strawn, then boosted their first-year associate salaries to $160,000.

The article cited a memo that Sidley Austin's management committee sent to its associates about the pay hike, which listed the new pay scale for first-through-seventh-year associates as $160,000; $170,000; $185,000; $210,000; $230,000; $250,000 and $265,000.

According to the article, the memo also discussed "the importance of remaining competitive with the top national and international law firms, so that we can continue to recruit and retain the most talented lawyers ."

Chicago law firms of all sizes followed suit, but the economic crisis that hit at the end of 2008 forced many of them to again reevaluate their business plans. As their revenues dropped significantly, some firms could no longer sustain their expenditures for first-year associate salaries.

According to Chicago Lawyer' s 2010 survey of the largest law firms in Illinois - which is based on Jan. 1 statistics - nearly 31 percent of the firms that reported their first-year associate salaries have lowered those salaries since 2009.

The five largest law firms in Illinois - Kirkland & Ellis, Sidley Austin, Mayer Brown, Jenner & Block and Winston & Strawn - continued paying first-year Illinois associates $160,000 in 2010.

Large law firms such as Baker & McKenzie and Skadden, Arps, Slate, Meagher & Flom and midsize firms such as Barack Ferrazzano Kirschbaum & Nagelberg also paid first-year Illinois associates $160,000 in 2010.

Other large firms, including McDermott Will & Emery, Katten Muchin Rosenman and Schiff Hardin, reported a decrease in their first-year Illinois associate salaries, from $160,000 in 2009 to $145,000 in 2010.

Sonnenschein Nath & Rosenthal also reduced first-year Illinois associate salaries from $160,000 in 2009 to $145,000 in 2010, while Wildman Harrold reduced first-year Illinois associate salaries from $145,000 in 2009 to $125,000 in 2010.

Midsize firms that revealed decreases in their first-year Illinois associate salaries included Ungaretti & Harris, from $140,000 in 2009 to $125,000 in 2010; Perkins Coie, from $160,000 to $145,000; and Thompson Coburn Fagel Haber, from $135,000 to $110,000.

Some firms continued to pay high salaries to their first-year associates, because they saw the economic downturn as an opportunity to attract the best talent, Nelson said.

But, he said, "The reaction of many firms was to be more moderate, and say, 'Well, we don't need to pay the top price. We can still get very good entry-level associates and significantly reduce our costs.'"

The economic downturn affected law students, law firms and the general practice of law, and Nelson and others in the legal industry believe it could continue to do so in the future.

Many law firms compete on first-year associate salaries to recruit the best and the brightest graduates, even though it often requires them to raise billable-hour targets for first-year associates and potentially increases their turnover rates.

"To get the top recruits, firms have had to pay that much," Nelson said. "What can you actually tell a beginning associate about their odds of making partner? You have to have a lot of faith in the future and in that institution, and given the level of uncertainty in the market, that's hard to do.

"It's almost become like a New York model, where there's a low chance of making partner and an expectation that you'll put in a huge number of billable hours, but that you'll need that high beginning salary to pay off debts."

According to Lee Allbritton, a founding partner of Amicus Search Group, a Texas-based attorney search and staffing firm that opened an office in Chicago last year, the top five law firms in Chicago paid first-year associates around $70,000 in 1994.

After remaining stable for two years, he said, first-year associate salaries began escalating in 1996. They reached more than $160,000 by 2006.

"That represents a 130 percent increase in compensation in just 12 years," Allbritton said. "No other profession, to my knowledge, witnessed that kind of cost escalation in such a short period of time."

Allbritton attributed the dramatic increase to "keeping up with the Joneses." Attorneys in banking and finance practices in law firms in New York, San Francisco and London fueled the competition, as they worked with clients who didn't care about the cost of their legal bills.

"In order to pound their chests and say, 'We're the best at X, Y and Z firm in New York,' they raised salaries," he said. "That forced the guy down the street to raise salaries and that forced people in Chicago to look at what's happening in New York, and they raised salaries."

The "deregionalization of American law firms" occurred at the same time, he said. In the past 10 years, dozens of national and international firms opened offices in Chicago alongside the city's large, midsize and boutique law firms. Even if Chicago law firms didn't intend to raise first-year associate salaries, they wanted to keep up with their new competitors.

"Skadden Arps is in town, Latham & Watkins is in town, and all of these major East Coast firms and West Coast firms have set up shop in your city," Allbritton said. "They want to pay their associates the same in Chicago as they do in Washington and London."

Some law firms decreased their first-year associate salaries, since many new law graduates were willing to accept lower offerings as a result of the bad job market, he said. The law firms that didn't decrease their first-year associate salaries wanted to appear as if they hadn't been affected by the economic downturn, he said.

Even as many law firms struggled in the past couple of years, spin-off and boutique firms - rallying against high rates and high salaries - proliferated in Chicago and other cities around the country.

Patrick Lamb worked for Chicago law firms Katten Muchin Rosenman and Butler Rubin Saltarelli & Boyd before starting the Valorem Law Group in 2008 with a handful of colleagues, who were also "big-firm refugees."

"We were all in the mind-set that the annual increases in rates and the pressure to bill more hours was just not sustainable," Lamb said. "And clients definitely were starting to push back on a number of fronts."

Lamb left Katten when first-year associate salaries spiked to $125,000 - a number that now seems quaint, he said.

As e-discovery exploded on the scene, law firms directed their large classes of first-year associates into profitable document reviews. These associates could bill as much as $300 an hour to review documents for 2,200 hours a year, Lamb said.

"When you put people in this situation where they're reviewing documents for several years, they don't feel that their talents are being used," Lamb said. "It's not really what they signed up to do, so they start looking for other opportunities."

Valorem Law Group, which has grown from four to nine lawyers, doesn't hire first-year associates. The firm hires contract lawyers or joint-ventures with similar firms if they need to staff a larger case.

"I'm not sure that most of these smaller firms are going to be hiring people out of law school," Lamb said. "People in small firms who are using these kinds of non-hourly fee arrangements really value experience."

Charles Hallab, the hiring partner at Baker & McKenzie, said his law firm didn't see any reason to decrease its first-year associate salaries from $160,000.

"We try to stay tuned in to everything that's going on, including what other firms might be doing," Hallab said. "But, really, we make our decisions based on what we feel is appropriate and right for ourselves and our incoming associates.

"We did not feel it was necessary, at least at this point, to make any adjustment downward in that starting salary."

Baker & McKenzie discusses how to creatively and pragmatically hire junior associates and laterals, but doesn't focus on salary figures, he said.

The firm also doesn't bring in huge starting classes. In 2009, the firm hired roughly 17 first-year associates, which Hallab called an "aberration." This year, the firm plans to hire seven or eight first-year associates.

"Usually, we're in the 10 to 12 range," Hallab said. "This year, we're a little below that. Next year, we'll be even below that. . We've just been cautious."

First-year associates can be worth $160,000, he said. As the firm becomes more surgical in its hiring, the addition of the right person to the team becomes more valuable to their practice and to their clients, he said.

Bryan Schwartz, founding partner of the midsize firm Levenfeld Pearlstein, said top law firms appropriately pay $160,000 to their first-year associates.

Law firms that command $300 or $400 an hour for an associate work them hard, he said.

"You've learned to bill like nobody's business, because that's how they can rationalize paying $160,000," Schwartz said. "If they're making $500,000 or $600,000 off someone they're paying $160,000, that's a nice profit."

But the numbers don't add up for law firms that only bill their associates out at $200, he said. Some clients won't even pay that much to train first-year associates with no experience, he said.

Levenfeld Pearlstein only hires associates who have been out of law school for three years, and if they're valuable, they could earn more than a seventh-year associate at the firm, Schwartz said.

They pay their associates competitively, because they also want to attract valuable candidates, he said.

"If we're not competitive with other firms, it's going to be hard to bring those people in," he said. "We will be competitive at the third-year rate; it doesn't make sense for us to be competitive at the first-year rate."

Schwartz, who began his practice at a small firm, said instead of learning how to make money, he learned how to be a lawyer.

"People come out of school with so much student loan debt that they can't make that decision," he said. "What we have are a lot of people very focused on money, very short-sighted about their career, and many people, who after the fifth year of playing this game incorrectly, leave the profession."

Billie Watkins, the Chicago branch manager of Robert Half Legal, confirmed that first-year associate salaries in Chicago remained flat or decreased in 2010.

According to statistics from the Robert Half Legal 2010 Salary Guide, first-year associates in large law firms, which consist of 75 or more lawyers, averaged between $130,995 and $161,438.

First-year associates in midsize law firms, which consist of 35 to 75 lawyers, averaged between $87,945 and $123,922; while first-year associates in small to midsize firms, which consist of 10 to 35 lawyers, averaged between $67,958 and $101,168.

The survey also showed that first-year associates at Chicago's small law firms, which consist of 10 or fewer lawyers, averaged between $61,192 and $89,790.

More than in previous years, new graduates need to show what skills and qualities they can bring to a law firm in order to win a first-year associate position, Watkins said.

"If you think about it, firms were using high salaries as a primary recruiting tool just about four years ago," she said. "There's been a fundamental change, where they may still pay a high salary, but the candidate is going to have to show why they deserve it, and if they can provide enough value that they deserve to be paid that [salary]."

Justin Miller serves as the San Francisco Bay Area director of the Legal Specialty Group at Union Bank's The Private Bank, which provides financial services to law firms and attorneys around the country.

In his work with law firms, Miller noted two major trends: a break from lock-step compensation of associates and an increase in non-partnership track associates.

Historically, law firms paid partners under a lock-step compensation model, he said. While some New York firms continue the practice, the majority of firms transitioned to performance-based pay for partners and are considering a similar move for associates.

Some firms have gone beyond the performance-based structure and integrated non-partnership track associates, also referred to as second-tier associates or staff attorneys, Miller said.

Non-partnership track associates are full-time employees who work on document review or due diligence for clients at rates that are 25 to 35 percent less than those of traditional associates, he said. They're also often paid as much as 50 percent less than their colleagues.

This model works best if the non-partnership track associates are not straight out of law school and are not interested in moving up at the firm, Miller said.

"While it might not pay as much as a traditional associate, it's still a nice, secure paycheck," he said. "On top of that, a traditional associate has to sacrifice part of their work/life balance in order to make partner. That time commitment is not expected of a non-partnership track associate."

Law firms will hire fewer first-year and second-year associates if they add non-partnership track associate positions, Miller said. These firms will save clients money and still maintain a profitable, leveraged model.

"That means for a lot of these students out of law school, they will need to find legal experience elsewhere," he said.

Jeffrey Warren, the managing partner of midsize firm Burke, Warren, MacKay & Serritella P.C., said his firm tried a different approach when most firms entered the bidding war over salaries several years ago.

They talked to managing partners who boosted their first-year associate salaries to $125,000 and learned that they expected their first-year associates to bill 2,200 hours each year. Since Burke Warren only expected its first-year associates to bill 1,800 hours, the firm transferred the big-firm billable hour rate to equate its own first-year associate salary of $102,500.

"We said we'll take $56.82 an hour, the same hourly rate of pay that the big firms pay, and we'll multiply that by 1,800," Warren said.

"It was the same rate per billable hour, but because we demanded 400 hours less annually than the big firms, our salary was reduced proportionately," he said.

Burke Warren also told first-year associates that if they billed more than 1,800 hours, they'd earn a bonus of $56.82 for each quality hour, Warren said. If they billed 2,200 hours, they'd make $125,000, like first-year associates at other law firms.

The firm additionally offered bonuses to the first-year associates who were able to recruit new business.

Burke Warren now pays its first-year associates $120,000 under the same model, and in the past month, attracted one associate from Kirkland & Ellis and another from Jenner & Block.

"There are a number of law students who initially will focus strictly on a big-name firm with a big salary," Warren said.

"Those are the people that we are very successful in hiring on a lateral basis in two or three or four years . that realize what they thought was going to be their best bet in law school really wasn't."

As Nelson continues to consider the recent decrease in first-year associate salaries from a sociological perspective, he said it'll likely impact law students, law firms and the practice of law in several different ways.

Law students can no longer take out huge loans with the assumption that they'll be guaranteed a high-paying job after law school. Even though some students might be more cautious about the cost of law school, the majority will continue to attend the highest-ranked school that accepts them, he said.

The possibility of fewer high-paying jobs could also lead to more competition over prized slots at top law schools, Nelson said.

"It may begin to favor those people who can afford to pay for law school," he said. "Historically, we've seen that children of professional parents, for example, are more likely to get into the top law schools. That may not be just money - it's probably also preparation and background.

"But students have to be able to shoulder more of the risk. That's going to benefit people from wealthier backgrounds."

Nelson also predicted that the decrease in first-year associate salaries will lead to further tiering and segmentation within the law firm market.

In looking at the big picture, if one group of lawyers earns considerably more than another group of lawyers, it could re-create inequality in both the legal profession and larger society, Nelson said.

"There has to be some way that those professional careers are validated and valued," he said. "That poses a challenge for the law and for the society more generally."