Lawyers: Say farewell to that guaranteed raise

February 16, 2011, 10:00 AM UTC

Lawyers are joining the ranks of other once-secure professionals as the promise of increased pay with seniority drifts into the ether.

Lawyers, along with other once predictably secure professionals like teachers and government workers, are seeing the beginnings of a shakeup in the way they are promoted and paid. These professionals are facing the erosion of tenure and a push for merit-based compensation, causing concern among those long used to job security and the promise of increased pay with seniority.

Pay-by-seniority, long part of teacher and public service worker contracts, has come under fire as taxpayers demand changes in the wake of major state and local budget deficits. And it looks like lawyers are next.

Most discussion of the legal industry’s woes — where corporations usually pay the freight — has centered on large law firm layoffs and the elimination of thousands of jobs, which have left many recent law school graduates scrambling for employment.

To stay competitive, the legal world, long known for its resistance to change, is edging toward reshaping its customary ways of doing business. More and more influential firms are jettisoning lockstep advancement for their associates. These junior lawyers perform onerous hours of research and analysis that underpin the firm’s business, and they have come to expect handsome, uniform compensation in return, which helps them pay down their $100,000-plus law school debts.

So far, a group of big-name law firms including Reed Smith, Baker Botts, DLA Piper and Orrick, Herrington & Sutcliffe have adopted merit-based compensation systems. Others have toyed with upending traditional compensation practices, but have decided that it might scare off top-notch talent. But some legal industry observers believe widespread change is in the offing.

“These are workers on the factory floor,” says Peter Zeughauser, a legal industry consultant, “and economic pressure means law firms will be looking to cut in favor of cheaper labor through off-shoring, outsourcing and technology.”

Last year, the American Bar Association set up a commission to study the recession’s impact on the legal profession. Its chair, Allan J. Tanenbaum, says that cost pressures on law firms pre-dated the economy’s downturn. But the pressures came to the fore, he says, when the 2008 law school graduate class suffered from 80% unemployment.

“Law school students still wanted to chase the brass ring,” says Tanenbaum, “but hiring ground to a halt.” The employment situation will improve, he predicts, but law firms in recent years have been hiring fewer associates, and that may not change soon.

The law firms adopting merit-based compensation emphasize that they are focusing on new training programs and goals to lift the competency levels of their legal apprentices. So far, most of these firms are sticking with the current entry salary of $160,000. The pay differences among associates come after that.

Typically, law firms have awarded associates uniform yearly pay increases. At the end of the apprentice period — often eight years — lucrative partnership offers were bestowed on a select few.

Recently, as corporations have begun to ask for greater transparency in how their legal fees are calculated, law firms have begun to reconsider the traditional partnership track, where considerable time, money and training are invested in a large number of associates, most of whom will not make it to the firm’s top rung. Although each firm is different, only a small percentage of associates typically advance to the partnership level, and a decline in corporate business has meant that even fewer landed a top spot in the past two years.

Baker Botts, a major law firm based in Houston, last year abandoned lockstep promotions and moved to a merit-based pay system. The firm has 725 lawyers, about two-thirds of whom are associates.

“You were bumping people up in salary based on the number of years out of law school,” says Serena Miller, the firm’s director of professional development.

“We did not set benchmarks,” Miller says, “but we expect associates to achieve increasingly higher levels of competency in writing, oral communication, client service and relationship skills.”

“We don’t expect them to figure this out themselves,” she says. “We are creating a curriculum, and provide assistance like writing tutorials, if needed.”

Orrick Herrington & Sutcliffe began its new compensation structure last year, according to its chairman and chief executive Ralph Baxter, because “of fundamental changes in the practice of law at large law firms, or big law.”

Clients are increasingly demanding more efficient work but want to pay less, and competition among law firms has heated up as they grow in size, and technology has made support work available from less expensive locations than Orrick’s home base of San Francisco, Baxter says.

“How do you explain to the client that we are increasing an associate’s salary no matter what the quality of work?” Baxter asks.

Reed Smith LLP, a huge firm with 1,600 lawyers worldwide, instituted a new merit-based system called CareeRS in late 2009, revamping how the firm classifies its 600 associates, about 450 of which are based in the United States.

The firm provides a training program to help associates develop their legal, leadership and business skills. Like other firms, Reed Smith said it started to move away from seniority-based compensation before the economy soured.

“This gives greater transparency to what it takes to be successful at the firm,” says Nicky Dingemans, the firm’s global chief people officer. “It takes more than legal skills.”

The firm’s new system also accounts for time that associates spend doing activities that are not billable, such as recruiting or pro-bono work, Dingermans says. How that will be taken into consideration by the firm is unclear.

Law firms insist that overhauling the partnership track does not diminish the chances of landing a prestigious partnership.

“This should not change the way people become partner,” says Miller, of Baker Botts.

Legal industry consultant Peter Zeughauser disagrees. “The old theory of cream rises to the top is changing. There will have to be more effective hiring screens so a firm does not hire 200 to 300 people and only 30 make partner eight years later.”

Cheaper technology, he says, “will core out the guts of firm profit-making so fewer people will be hired and fewer will make partner. We have moved away from the golden era, which lasted from 1990 to 2007, when firms had more money.”

These shifts, Zeughauser says, will likely lead to a widening gap between the lawyers that manage to make partner and those who don’t.

“We will see the advent of the rich partner class, with partners making $10 million and more because the field has contracted,” says Zeughauser.

Editor’s Note: An earlier version of this story incorrectly referred to the law firm Orrick, Herrington & Sutcliffe as Orrington, Herrington & Sutcliffe. The sentence has been corrected.

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