s another associate salary storm looming on the horizon?
Bay Area firms say it's too soon to predict since they won't be setting new compensation packages until early next year. But the announcement last week that New York's Sullivan & Cromwell is giving $35,000 year-end bonuses to all its first-year associates has firms buzzing.
At least two other New York firms have followed Sullivan's lead. Cahill Gordon & Reindel announced that it is matching Sullivan's figure, and Cravath, Swaine & Moore is surpassing it with an across-the-board bonus of $40,000 for first-years.
"What major New York firms pay will have some impact on what we pay," said Lee Benton, Cooley Godward's managing partner. "It's possible the [salaries] won't be matched dollar for dollar, but Bay Area firms will end up relatively close."
Some firm managers are downplaying Sullivan's announcement, saying their first-years could pull down an equivalent bonus by meeting certain billable hour targets.
"I think it's a nonevent," said Orrick, Herrington & Sutcliffe chairman Ralph Baxter Jr. He said Orrick associates billing 2,400 hours would get a $20,000 bonus and have the potential to receive an additional $15,000 discretionary bonus. Sullivan has no minimum billable hours, and Sullivan chairman H. Rodgin Cohen declined to say what the average is.
Crosby, Heafey, Roach & May partner Jack Nelson also questioned whether Sullivan's move would have ramifications on the Bay Area since the firm did not increase base pay. "I don't think this is an opening salvo in base increases," he said.
Cohen said the firm does not plan to increase its current $125,000 base pay. But because all first-years are receiving the same bonus regardless of their billable hours, $160,000 may be the new de facto base pay.
"I think it's semantics," said Peter Zeughauser, of the Newport Beach-based legal consulting firm ClientFocus. "The message Sullivan is communicating is that they are not locking into that forever." But, he said, "I don't see how they will back out of it."
And in order to remain competitive, Zeughauser contends California firms are going to have to match Sullivan's compensation.
New York firms have historically paid more than their California brethren. But that changed last year when Gunderson Dettmer Stough Villeneuve Franklin & Hachigian upped first-year base pay to $125,000 with a guaranteed minimum bonus of $20,000. Major Bay Area firms fell into line matching Gunderson's base, as did firms throughout the country.
Local firms say the salary hikes helped firms recruit lateral associates from New York. "It may be one reason that Sullivan bellied up to the bar and said 'we're going to pay these bonuses,'" Benton said. "They recognize the brain drain they face."
Sullivan's Cohen responded that there is no "New York-California thing" going on. Rather, the bonus is "a statement about where the legal market is today" and the valuable contribution associates are making.
Cohen said the firm announced the bonuses before the end of the year in response to queries from job applicants. "Since we were telling them, we thought we should tell the associates," Cohen said.
The compensation package may be intended to offset Sullivan's reputation as a tough place to work. In Recorder affiliate The American Lawyer's annual midlevel associate survey, published last month, associates gripe about the firm's rigid hierarchy and their treatment by partners. The survey reports that about a third of Sullvan's midlevels said they were looking for another job.
Cohen said the bonus is not intended to improve associate retention. Indeed, associates across the country would welcome a cut in pay if they could work fewer hours, the AmLaw survey said.
A few firms offer associates the option of lower minimum billable hours for less pay. Howard, Rice, Nemerovski, Canady, Falk & Rabkin has a dual track with associates choosing either 1,825 or 1,950 minimum billable hour requirements. Firm managing partner Stuart Lipton said one in three associates opt for the lower target.
However, Gunderson managing partner Steven Franklin says it's not always possible to make that trade-off. "The firms with the most interesting work and best reputation get more of that work," he said. "It's very hard for firms to turn away top-tier work."
To recruit top talent to handle the work, Zeughauser believes firms will continue to up the ante. He predicts first-year pay will jump to $200,000-$250,000 within the next two to three years.
Many firms that struggled to match the last salary hike won't be able to do so in future rounds.
"There will undoubtedly be a consolidation that comes out of this," Franklin said. "It's going to be hard for marginally profitable firms to stay in business."
Recruiter Avis Caravello agrees. Big firms with equity
in their clients "can pretty much absorb" the salary hikes, she
said. "But firms that don't have equity and aren't corporate driven
are really taking it on the chin."
Cooley's Benton said firms outside the Bay Area and New York will have the most difficult time keeping up with escalating salaries. He said firms in mid-size cities throughout the country matched Bay Area salaries this year because they feared a brain drain. In fact, the reverberations were felt around the world.
"We get complaints from partners in London as to what we did to their numbers," Franklin said.
The complaints are likely to intensify, Zeughauser contends.
"It's all happening because of the Internet," Zeughauser said, "and it will happen at Internet speed."
