Firms' 'Ego'-Driven Salary Structure Can't Last: Experts

By Nick Brown

Law360, New York (October 02, 2009) -- While plenty of leading law firms have frozen or slashed associate salaries amid the current recession, just as many have remained dedicated to the status quo — a devotion that may be rooted more in ego than loyalty, some experts say.

Roughly half the AmLaw 20 firms — including White & Case LLP, Sidley Austin LLP, K&L Gates LLP and Mayer Brown LLP — have yet to announce freezes or reductions in associate salary, despite sustaining heavy economic blows.

K&L Gates, for example, laid off at least 36 attorneys and 79 staff members in March but has not announced pay cuts to associates.

The decision of whether or not to cut associate salaries depends on a great deal more than the economic landscape, legal experts say.

“It's a calculated business decision, basically,” Jack Zaremski, founder and president of New York-based legal consulting firm Hanover Legal Personnel Services Inc., told Law360. “Firms are trying to stay competitive.”

Zaremski invoked an auto-related analogy, comparing elite firms to Lamborghinis.

“In tough financial times, clients may be more willing to settle for a Mercedes, which is still a high-quality product,” he said. “Some firms realize this, and cut salary, knowing they will not attract quite as high a talent base, but they can offer clients services at a slightly lower rate.”

But not all firms go that route, Zaremski said.

“You'll always have firms that want to maintain that top-notch standing,” he said. “There will always be a niche for the Lamborghini.”

Charles Green, founder and CEO of Trusted Advisor Associates LLC, echoed the point using a different analogy — the 1966 Spaghetti Western “The Good, the Bad and the Ugly.”

“The famous line in the movie is, 'There's only two kinds of people in this world,'” Green said. “Well there's two kinds of law firms: Those that will keep their high rates and use people as their variable cost factor, and those that will reduce rates to keep their staff.”

The difference between the two models, Green said, is ego.

“Some firms, their egos are really tied up in saying 'We've got to be at the top,'” he said. “My guess is, they're willing to take a hit on profits per partner to maintain that 'first-among-equals' look when it comes to attracting top associates at top salaries.”

Jerry Kowalski, founder of legal consulting firm Kowalski & Associates, offered a different take, saying competition in the legal industry is less intense today than it has been throughout the last decade.

Firms hiked up starting salaries for associates in the 1990s to compete against other entities snagging up law school grads, namely investment banks and hedge funds, Kowalski said Thursday.

“The law firms actually won the race because, recently, those big investment banks have started to disappear,” Kowalski said. “So firms are looking around and saying, 'What are we, nuts?' and realizing they've been subscribing to a completely irrational pay structure.”

So why are some firms slow to reduce salaries? Kowalski answered the question with the help of his analogy of choice — the popular arcade game 'Whack-a-Mole.'

In the game, players must react quickly to hammer down plastic moles as they pop their heads from below ground.

“That's how law firms started dealing with these economic problems,” Kowalski said. “As each problem arose, they figured they could whack it away with one round of lay-offs or something drastic. They didn't think they needed to use a long-term solution, like looking at pay structure.”

Part of firms' hesitation to cut salaries could be image-related, according to Brian Manoff, legal recruiter with Pittleman & Associates.

“While [salary] decisions ... are usually dictated largely by internal drivers like costs and profitability, there are certainly external factors such as public perception that also come into play,” Manoff said Thursday. “As a recruiter, you hear daily from associates who have already developed a preconceived notion about a particular firm based upon what they have heard from a friend, third party, or in today’s world, a legal blog or Web site.”

But salary decisions don't have to be questions of ego, competition or public image, according to some consultants.

In fact, said Courtney Goldstein, partner at legal recruitment firm Major Lindsey & Africa, a decision not to cut salaries could be as innocent as a reward for smart business.

“There's some ego involved in every industry, but I think, when it comes down to it, the firms that have consistently been fiscally conservative, that did not engage in huge hiring sprees in 2007 and early 2008, are not facing the same dire circumstances,” Goldstein said.

Michael Rynowecer, president of BTI Consulting Inc., said a firm's business model also goes a long way in dictating its salary structure.

“If I want to decrease leverage, I want to keep my associates but pay them less,” he said. “If I decide to de-leverage, I don't need the associates, and I'm more likely to keep salaries high but lay people off.”

Each business model has its benefits, Rynowecer said.

“Proponents of the leverage model will tell you they can be more profitable, can grow faster, and will be able to scale,” he said. “The de-leveraged firms will say, even though it's a higher rate, more of the work is done by senior talent, and they can do the work faster and be more intimate with clients.”

So, which model will win out in the world of law?

“I think right now, in the next year or two, you're not going to see either one dominate,” Rynowecer said. “But put it this way: every other profession has gravitated to the more leveraged model over the long-term.”

Morgan, Lewis & Bockius LLP, Holland & Knight and Bryan Cave LLP are among the AmLaw 20 that have made salary reductions.

Other firms that have not made cuts include Skadden Arps Slate Meagher & Flom LLP, Dewey & LeBoeuf LLP and Dechert LLP.

None of the roughly 10 AmLaw 20 firms yet to cut salaries accepted invitations to comment on the matter Thursday.

While not all experts agreed on the cause of the firms' decisions, most voiced a belief that the high-salary system cannot last forever, due in large part to clients' dwindling willingness to pay high rates.

“As the economy suffered, clients woke up and said, 'Are we out of our minds, paying hourly rates to first-, second- or third-year associates who can barely find their way to the bathroom?'” Kowalski said.

Lawyers, too, have shown less enthusiasm for the demanding lifestyle the high-paying associate jobs require, Green added.

Zaremski acknowledged that cutting associate salaries isn't the only way a firm can save money, pointing out that several firms have held off on bonuses, adopted alternative billing methods and decreased pay for partners.

But at the end of the day, Rynowecer said, salary gets the most attention.

“Salaries are the biggest line items in any firm, and they're always visible,” he said. “Talk about a magnet.”

And, as badly as some firms may want to keep that magnet firmly attracting the cream of the legal crop, even the most ego-driven firms will have to give in eventually, Green said.

“The top firms may be the last to go, but somebody has to be last,” he said. “The longer the GDP continues to decline, the more you'll see them give way.

“It's ego versus economics,” he added. “And firms just can't afford that level of ego.”