By Aebra Coe

Law360 (August 25, 2020, 4:02 PM EDT) -- As a number of law firms walk back attorney salary cuts that were implemented earlier this year in response to the coronavirus pandemic, some say a resulting industry pay discrepancy could have a major impact on lateral recruiting going forward as the economy recovers.

A large swath of BigLaw implemented reduced partner draws and associate salary cuts this spring, many in the range of 15% to 30%, as they faced the financial uncertainty of the pandemic. But in recent weeks, a growing number have begun to pull back on those austerity measures as the summer draws to a close, citing plentiful legal work and strong financial results.

Still, a large number of firms that implemented cuts have yet to make the decision to hit rewind, and legal recruiters say existing attorneys and lateral candidates are keenly aware of how firms are directing their resources — with the potential that too-big, too-long cuts could hurt firms' competitiveness in the hiring market and in retention.

"Recruits of all kinds pay attention to the measures firms take in times like these," said Michelle Fivel, an attorney recruiter at Major Lindsey & Africa.

"As far as retention, this is a huge topic on associates' minds. Many are extremely busy — busier than they ever have been — but their pay has been cut and it doesn't sit well with them. Any measures firms can take to get them back to whole will be appreciated by those associates," she added.

Some firms that have recently dialed back reductions include Stoel Rives, which will reduce associate pay cuts from 20% to 10% beginning Sept. 1; Sheppard Mullin, which reduced its associate salary pay cuts from 12% to 6%; and K&L Gates, where associates will see a 15% pay cut reduced to 10%. Additionally, reductions in partner distributions at many firms have been eased as well.

The reversals come as industrywide data paint a picture of a fairly robust legal sector. A recent report from Citi Private Bank's Law Firm Group found that revenue, on average, grew across the industry in the first half of the year, driven by billing rate increases, while at the same time expenses declined due to decreased overhead.

One of the biggest unknowns in the early stages of the pandemic was whether firms, many of which were busier than ever in a number of areas, would face challenges collecting payments from clients and doing so in a timely manner, according to Barbara Mayden, co-founder of legal recruiting firm Young Mayden Legal Search.

"From the conversations I've had, the steep decline in collections hasn't happened," Mayden said. "Decline? Yes, but the drop for many is more in the 10% range than the 25% to 30% or more range. In March, it was the great unknown. In August, there seems to be a little more clarity, and firms are trying to right the ship."

Part of righting the ship is making sure attorneys don't jump ship due to pay cuts dragging on unnecessarily long, according to Michael Short, a principal at law firm consultancy LawVision.

"Right now, a law firm leader is in a precarious position. They have to figure out how to manage cash flow and manage expectations in an incredibly difficult time," Short said. "But it's also a time when law firms are doing well considering the circumstances and coming relatively close to budget."

Leaders now have to balance the need to be careful about finances and preserving cash flow in an environment that is still not completely predictable, with balance sheets that often illuminate their firm is in a fairly strong position financially, he said.

"The last thing you want is the sense that partners are being enriched or are better off than where they were … because of these [salary] cuts," Short said. "That is not a morale booster. When you take something away from somebody, you need to do it in good faith, and when you don't need it, you need to give it back in the spirit of good faith."

The danger of attorneys jumping ship is very real, as the lateral market has remained fairly healthy amid the pandemic — with law firms often not blinking at the idea of hiring and onboarding lawyers remotely, particularly if they specialize in a practice area that's currently busy, recruiters said.

Lateral movement will likely continue to increase, especially for firms that have not readjusted salaries, as partners and associates become disenchanted with their financial position, according to Jill Huse, co-founder of professional services advisory Society 54.

"From a lateral growth perspective, [the situation] offers a lot of opportunity for firms to show [a] position of strength as they look to expand market share with new talent as we head into the fall," Huse said.

When it comes to partner retention and recruiting, those candidates' perceptions about the financial health of the law firm is key, according to Gloria Sandrino, a principal at recruiting firm Lateral Link. And deep, long-term pay cuts may signal to those candidates that a law firm is struggling financially.

"From what the firms have told me, there are three reasons why the firms are rolling back the previous salary cuts and partner distributions: so that they don't lose partners to other firms, to demonstrate that they are doing well financially in the midst of COVID-19, and to attract lateral partners in Q4 of 2020 to salvage the year," Sandrino said.

Additionally, as firms think about year-end bonuses, the divide that has been drawn between those that have walked back pay cuts and those that have not, or those that never implemented them in the first place, may grow even larger, according to Major Lindsey's Fivel.

"I have been hearing end-of-year bonuses are something associates are thinking about. I have a feeling we will see many firms giving out year-end bonuses, although there may be some stratification — those doing well will be able to give bigger bonuses," Fivel said.

--Editing by Philip Shea and Rebecca Flanagan.

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