Now that several top-tier law firms have given first-year associates a big raise to $160,000, some of their smaller regional competitors say they're enjoying the consequence: a bump in business.
"There's a surge of new work coming in," said Stuart Liner of Liner Yankelevitz Sunshine & Regenstreif LLP, a regional firm with 85 lawyers. "It's been a boon to those of us who are able to price more efficiently."
Although rates vary, a smaller regional law firm might charge half or a little more than half of what a big national firm in the next skyscraper might charge. Top partners at regional firms may charge $350 to $700 an hour, but they can cost $1,000 an hour at the nation's big-name firms.
And now that salaries for lawyers are going up in the big firms, there's a belief that the rates the big firms charge their clients may go up soon, widening the gulf between big firms and small.
"Each firm is individually reacting to this phenomenon," said Dan Hatch, head of the partner practice at Major Lindsey & Africa LLC. "But there certainly are firms that will raise their rates to pay for this cost."
The phenomenon, as he referred to it, is the recent surge in pay for lawyers.
The pay for first-year associates at top firms had held steady at about $125,000 since about 2000, with a few exceptions. But a round of raises started in late 2005 and are continuing today.
Early this month O'Melveny & Myers LLP, an international firm that was founded in Los Angeles, raised its starting pay for first year associates to $160,000 firmwide. L.A.-based Quinn Emanuel Oliver Urquhart & Hedges LLP bumped first-year pay to $160,000 in February and Orrick Herrington & Sutcliffe LLP and Skadden Arps Slate Meagher & Flom LLP followed.
At the time of the last raise, Quinn's Bill Urquhart said the firm was responding to salary increases in the New York market, which has a higher pay scale.
Some other big firms with L.A.-origins, such as Latham & Watkins LLP, Gibson Dunn & Crutcher LLP and Paul Hastings Janofsky & Walker LLP have all given their New York associates $160,000, but are clinging to $145,000 in Los Angeles at least for now.
Most top-paying firms don't want to talk about it. Quinn, Latham, O'Melveny and Gibson Dunn all declined interviews.
Associate salary raises are cyclical, said Sandford Hillsberg of Troy & Gould PC.
"Salaries and billing rates stay stable for a period of time until some trigger causes the leading firms to increase associate compensation and that feeds on itself for a several-year period," he said. "It eventually stabilizes and associate billing rates are raised in concert with their increases in salary."
In the meantime, smaller, but well-known firms are getting more business. While labor and employment work is usually the first business to get outsourced to a cheaper firm, Greenberg Glusker LLP has had an influx of commercial real estate work. Liner Yankelevitz has seen an increase of institutional work across the board, including corporate, transactional and big-ticket litigation matters.
The litigation work is surprising because that is the kind of work that's usually sent to the big firms, regardless of cost, because the name of a major firm printed on the opposite margin of legal documents can scare some opponents into settling.
"It's a huge opportunity for firms like ours," said Randall Sunshine, name partner at Liner Yankelevitz. "Clients we compete for appreciate that we're not matching salaries. They think it's outrageous to pay $160,000 to someone with no experience and so do we."
First year associates are the bottom of the legal totem pole. Many come directly from law school or a clerkship and may be as young as 25. These attorneys don't come with their own book of business and are often relegated to such basic work as legal research, document reviews, and even fixing jams in the copier.
Liner said his firm has recently gotten institutional business from major firms that had been committed to another firm for a generation, or even two.
"There is something to be said about firms and clients and loyalty but there is something to be said about outpacing their clients," said Courtney Goldstein, head of the Southern California associate practice for Major Lindsey. "Firms can't raise their rates much, or clients will shop."
Liner pointed out that big firms' new interest in risky contingency cases and in smaller middle-market clients is evidence that the big firms need more work to support their new and higher cost structure.
"Last year there were 11 firms (nationally) that collected over $1 billion" in total billings, he said. "Those firms can accommodate any bodies they can get their hands on and make money, or not lose money. For other firms, I'm not sure it's the right model" to pay a starting salary of $160,000.
Latham & Watkins took in $1.62 billion in 2006. The only other law firm with an L.A. presence that was in the billion-dollar club was Skadden Arps. O'Melveny is the only firm paying a base of $160,000 in L.A. that brought in more than half that, or $870 million. Gibson Dunn made $809 million, but pays their first years $145,000.
One of the key factors to get lost in the associate pay debate is what's best for the young lawyers' career development.
While top-name firms pay well, and get great cases, there are more lawyers on staff, and more competition for the interesting work. But high student loan debt often nudges associates into the higher-paying jobs, at least for awhile.
"You see a lot of attorneys starting at the big firms, get a couple of years under their belt and go to a regional firm where they can specialize and build a book of business and where they can set their own rates," said Goldstein, who recruits associates for law firms.
The high associate salaries have, in fact, been an attempt to keep young talent in place. But experts say that attrition rates have never been higher. It's a gamble for big firms to pay high salaries for their freshmen because it's expensive to train associates, and therefore disappointing if they leave after a few years.
"We're the beneficiary," said Liner, who has hired attorneys from O'Melveny, Morrison & Foerster LLP, Heller Ehrman LLP and Akin Gump Strauss Hauer & Feld LLP this year alone.
"We love to hire attorneys who get a few years under their belt and are trained at a big firm," he said.
Even if some clients are shopping around for lower legal rates, one thing remains true about the legal work that Fortune 500 companies outsource: when the future of the company is on the line, general counsels will pay whatever a big-name firm wants to charge so their judgment can't be questioned if things go badly.
"It's often the case if they lose the case, they can't be second guessed for their choice of a national firm," said Hillsberg of Troy Gould. "It's a very common phenomenon."
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