The days may be numbered when top young lawyers, recruited out of school with salaries of $160,000, are guaranteed annual raises and bonuses.
Some big-name law firms with a significant presence in Los Angeles are eliminating guaranteed raises for junior lawyers.
The move comes amid signs of an economic downturn, but it's also in response to concerns about how the fast-rising pay is boosting billing rates.
Companies in Los Angeles that will get the most relief include Nestle USA, Univision Communications Inc., Avery Dennison Corp., Northrop Grumman Corp. and Toyota Motor Sales USA Inc. because they have high expenses as a result of outside legal services.
One company, Parking Co. of America, based in Downey, manages parking services at airports, and has already seen advantages.
Eric Chaves, president and general counsel for Parking Co., said the company's legal bills have decreased as a result of the new associate salary model.
"It has kept our costs down," Chaves said. "The work is given to the person who is appropriate for the job, so there are no learning curves. The billable hours have been much less than they have been before."
Large law firms in recent years have recruited attorneys out of law school with a guarantee that they will get raises of about $10,000 each year, but often more, and may be accompanied by bonuses. That was a way to attract and retain bright young lawyers in a competitive market. But it is becoming apparent to law firm leaders that the system may no longer be sustainable because clients will be more inclined to balk at ballooning legal bills in the midst of an economic downturn.
Los Angeles law firm Manatt Phelps & Phillips LLP was a pioneer in the shift. What's new is that some other large national firms are now adopting the reform.
"It's not a sustainable model to look at all second-year associates as a uniform group and increase their pay and billing rates by 6 or 7 percent," said John Childers, a Los Angeles-based legal consultant with Hildebrandt International Inc. "Clients feel like they are overpaying these people, and some partners feel like they are overpaying these people."
Washington D.C.-based Howrey LLP recently decided to break away from what's known in the legal world as the "lockstep" system. Howrey will now give raises to its associates based on performance evaluations. The 700-attorney firm's new pay model, which goes into effect in January, will connect associate salary increases to evaluations and how well the junior attorneys master core legal skills.
The revamped system is designed to get a handle on rising salaries, which in 2007 hit a sky-high $160,000 for first-year associates at top firms.
"That's what the underpinning of all this is: Can we keep from having the vast majority of our associate attorneys with compensation levels far above $200,000 unless individual productivity merits it?" said L. William Nason of San Diego-based legal search firm Watanabe Nason LLC.
Howrey isn't alone in the push to turn the longstanding lockstep model on its head. Washington D.C.-based McKenna Long & Aldridge LLP, which has 69 attorneys in Los Angeles, in January will enter its second year under a performance-based compensation model.
Manatt Phelps moved to the evaluation system a decade ago. William Quicksilver, chairman of the 450-attorney firm, said the change provided tangible value to their clients.
"Clients are savvy, and they are increasingly creating a connection between cost and value," Quicksilver said. "And law firms have to be increasingly sensitive to that."
Of course, there is skepticism from associates who don't want to give up the security of receiving a salary increase each year.
Amber Finch, a senior associate in Howrey's Los Angeles office, has been practicing for six years. She said some of her fellow 348 associates are taking a wait-and-see approach with respect to the firm's new model.
"As long as I have practiced, this is all we have known," she said. "And this type of change takes time and it takes time to work itself out. There is the fear of the unknown."
The change could present time and management issues. Senior attorneys will have to spend time evaluating junior associates, and firms will have to present goals they expect new attorneys to meet.
"It's going to turn this into quite a laborious task," Nason said. "Every year there is going to be the same sort of deep-rooted evaluations for partner candidates, and now associates will require the same rigorous evaluation."
Firm partners recognize that spending more time evaluating associates can eat up hours that would otherwise be spent on client matters. But partners argue the benefits outweigh the costs.
Terree Bowers, a white collar litigator in Howrey's L.A. office, also serves as a supervising partner for the new promotion model. He said Howrey leaders have been careful to prevent work overload in implementing the evaluation system.
Here's how the system works: Partners mentor junior attorneys and make sure that they meet goals before they receive pay raises. Raises are contingent upon getting a promotion to a "next level." Firms want to move away from the concept of "first-year attorney" and refer to junior associates by their level. So senior partners at the firms drew up a list of basic skills that associates need to master at each level before moving onto the next.
At Howrey, associates are currently being placed into five tiers. In order to advance through the ranks, an associate must complete core legal competencies, including taking a deposition or running a trial. The firm is also placing more emphasis on associates' business skills, and evaluating their client development and management abilities.
Michael Rizzo, an L.A. McKenna Long partner and chairman of the associate compensation and evaluation committee, said firm partners hold quarterly meetings to evaluate junior associates.
"During the meetings, we review where the associates are with respect to annual career and professional development plans," Rizzo said. "We are intent on getting associates out of their current level and into the next."
Associates said knowing what skills are required in order to advance in the firm helps them better define their career paths.
"It allows associates to know what is expected of them, and allows for associates who want to matriculate through the system toward partnership more quickly," said Michael Udell, a level three associate who has practiced at McKenna Long for two years.
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