Salaries Spike as Firms Struggle to Compete
by Diane Hartman
by Diane Hartman
The winds of change—looking more like a hurricane all the time—are howling through at least one side of Denver's legal community.
Since word got out that at least four national firms in this area are paying first year associates $125,000, the repercussions for many of the larger firms haven't stopped.
At the beginning of March, the biggest six hometown firms were paying first-year associates in the low 70s. As of April 1, one has broken out and is offering $90,000. Even if the others aren't quite ready to raise salaries, many of which were put in place last fall, partners are spending a lot of time nervously mulling the situation. One said: "We're spending an inordinate amount of time on this!"
Historically (that would be two or three months ago), Denver could just duck. Operating under the "Denver tax" concept, firms here offered less than those on either coast, saying that a better lifestyle made up for less money. Until recently, the cost of living wasn't quite so high.
The first shot was fired not from New York—the usual trendsetter in compensation— but from Silicon Valley.
A high-tech firm in California set off a frenzy, first raising salaries last December to $125,000—and then to $145,000 (plus various bonuses). The firm's business included more than 90 IPOs, 780 venture and private financings, 300 joint ventures and 125 mergers for high-tech and emerging companies. Nine of their associates had jumped to high-tech start-up companies, and they didn't want to lose any more.
Other California firms anted up, then some New York firms followed. In March, national firms in other pockets (Chicago, Miami, Dallas, Seattle—and Denver) began feeling the pressure to match coastal salaries.
Only a handful of Denver firms pay the high dollar, and a smattering are over $90,000.
Partners are grumbling—will the money come from their part of the pot?
There's some jealousy and wonderment—nobody ever offered them this kind of money when they got out of school.
Associates also are grumbling. They hear the new numbers and many conclude: "I'm underpaid." They closely follow a hot Web site called Infirmation.com where the salary rise can be charted. A click away is the "Greedy Associates Board" where bitter chatter is posted daily.
The crux of the problem is that the hot national firms—for the most part —are not competing for the same business but "they are competing for the same people." Older firms are used to dealing with "bricks and mortar" businesses, charging them by the hour. The new national firms rely on creating huge deals in the high-tech area ("the venture capitalists are throwing billions around") and from these deals come big salaries. Carving out competitive salaries for associates, when they're not doing these big deals, will be very difficult for the older, local firms.
A senior person at a large local firm where their young are paid in the 70s said: "They're not even worth $70,000! Economically, there's no justification. But it's a market driven force. If you want the best and the brightest talent, you have to pay for it."
Just who is this highly-prized new lawyer?
"We want someone from top schools, both undergrad and law school, with the best grades," said a partner at a national firm. He did say they were hiring more laterals with specific practical experience. From a local firm partner: "We've traditionally recruited out of DU and CU, but all of a sudden we might have to look at other schools, although I don't want to see that happen."
"Really, it's a bit misleading," according to a partner at a mid-sized local firm. "I think those huge salaries are being offered to a select group of doubly-trained people—engineers/ lawyers, etc. They're certainly not being offered to the average law school graduate."
In talking with partners at the cluster of large local firms, they all want the top students. "Maybe we'll be going into a draft situation," said one. "How many tops can there be?"
Across the country, there's much talk about young people on a roll in high-tech fields, involved with IPOs, pocketing multi-millions. If bright young lawyers are enticed away to these firms, they may get a piece of the action and with luck, get rich overnight.
For some, it's hard not to consider the possibility.
One fourth-year associate, still $60,000 in debt, has decided for the present to stay with a well-established big firm in Denver, although "I get calls from headhunters every day." He and a friend laughed when their firm went to "business casual" every day—"That means they're not going to pay us more." Although he likes his firm, his colleagues and the type of work he does, sometimes he weighs all that against his loan and his lifestyle.
At one large local firm where they plan to "do something, but probably not match what's going on," the partners are constantly talking with the associates. "We know they want compensation, they want training, they want some balance in their lives and time for families, and we're trying hard to listen to what they say. We're trying to enhance the training, mentoring and give them sets of skills." This is what one attorney calls "psychic income—we hope that will make up some of the difference."
Another pointed out that fields like law and medicine aren't attracting college graduates the way they once did. Dot.Com companies are a siren song, as are other high-tech fields. "Law has never been a profession to get rich in," commented a partner from a top-20 firm, whose firm has lost several people.
"I'm afraid what we say is that if you're leaving a place where you like the people and the work and think you're developing your career, well . . . don't let the door hit you on the way out. You just showed me where your values lie."
An associate at a small firm commented: "I've always felt underpaid, and that was before this increase. My friends who work at the local big four think they're being underpaid—and they make twice my salary." She added that paying back school loans is usually a 10-year process, and these are the years when many marry and start families. "It's a balancing issue."
Those making the salary decisions are caught in the middle. They hear the grumblings of associates who think they're underpaid—and they also know that they can neither pay associates more than partners, nor can they take away a big chunk of partner profits, without the possibility of the partners leaving.
"Firms who decide to take it out of partners' hides are asking for trouble," said one partner in a large local firm.
He addressed another obvious point —who's really going to pay for these increases?
"I think in the next year or two you'll see the biggest increase in the cost of legal services in our history. I think you'll see $100 hourly rate increases. Don't fool yourself: This will be passed on to clients." He distinguished between "old-economy" companies and "new-economy" companies. "The old-economy companies will find all this difficult to understand. But in the end, they'll have to pay. Because you always want the best legal services you can get. I know some firms will try to hold the line on costs and salaries, but if they do, it might cause them more trouble in the long run and be to the client's detriment."
One hometown large firm has hired a compensation consultant. "We're meeting to see what our response should be (to the raise in salaries). The Brobecks of the world have thrown us all into turmoil." (Brobeck, Phleger & Harrison, a national firm with an office here, was one of the first to pay the $125,000 starting salary). Another hometown firm feels their associates are pretty happy: "We've gotten law school graduates who are sophisticated enough to know what goes with the dollar signs."
Will billable hours skyrocket to backup these increases?
Yes would be the intuitive answer, but some firms say no— with an interesting caveat.
"Will they be asked to work more?" asked someone at a national firm. "No. Our attorneys work hard as it is! We hire the best. You're expected to work at Internet speed and provide the level of service required in a fast economy. It's a very energetic market. In our kind of climate, you have to be responsive. Our associates work when they need to. It's not uncommon to work all night when you're putting together an IPO. These things don't wait. We do whatever it takes to get the job done. And I'll tell you that for our employees, it's more than the salary, they enjoy the work. It's very challenging and engaging."
A "hometown" partner said "We can fill up our associates' time with really good business as long as this economy keeps pumping. We budget for 1,800 hours. The pressure to bill 2,500 hours does nothing but put on pressure. The old rule still applies. You work 10 hours to bill six. It's a fact of life. If we ask too many hours, the message we would be giving new associates is that it's okay to fudge a little on their time. And we don't want them to."
While some firms are offering more "quality of life" options (including fewer hours expected), some people said that of course billables will go up, especially with tempting bonuses, and figures over 2,400 were mentioned.
One partner commented that young associates don't know the difference between 1,900 and 2,400 hours—"it means having a life, seeing your children and spouse, getting to work out. But they'll find out what it means."
This jump in salaries, of course, is going right over the heads of many solos and small/medium firms. One person we interviewed, who works at a small firm, hadn't even heard of the salary wars.
A young solo said: "It's outrageous. It's not in our world. I can't imagine paying these sums for unproven lawyers." At many small or mid-level Denver firms, the standard starting salary would be in the $35,000-45,000 range, he said, taking students from the top 20 percent of Colorado's two law schools. "And many would happily work for less than that. The problem is that the publicity has raised expectations among most attorneys."
A partner at a medium-sized firm said she offered a job to a young woman, at what she thought was excellent pay (in the high $40s). "She told me it wasn't worth her time—and she had no experience!"
A recent story from the National Association for Law Placement said that nearly 44 percent of all new graduate salaries were reported to be below $40,000.
More repercussions are predicted in various areas.
There's general agreement that pro bono work, already down, will take a hit with people working so hard. Some firms will pay more, but hire fewer people. Firms may pay one associate (from a top school, etc.) one salary and offer less money to another. Firms may be more willing to take on those who want to work 80 percent, make less, not be on partner track, but have more time off. Contract attorneys may become more popular. Mid-sized and small firms may go belly up, "if they continue to try to be all things to all people," said one marketer. More firms may give associates a stake in the success of the firm by tying compensation to results, not just billables.
And then of course, this "bubble economy" may burst and wholesale layoffs of associates wouldn't be out of the question. "We'll try to compete," a local partner said, "until the tech bubble bursts. Then there will be a lot of unemployed lawyers."
Our prediction: It's a roller coaster out there with no end to the bumpy road in sight.
(If anyone wants to discuss this anonymously, please e-mail: firstname.lastname@example.org or call her at (303) 824-5312.)