U.S. law firms, including Orrick, Herrington & Sutcliffe LLP, Shearman & Sterling LLP and WolfBlock LLP, are abandoning tradition as they cut costs in the deepening recession by imposing merit pay, slashing salaries and generally putting an end to decades of associate entitlement.
The firms are responding to the plunge in corporate, real estate and finance work by overhauling compensation for associates, who often total as many as two-thirds of a firm’s lawyers. Some, like Orrick, are beginning to reward lawyers based on performance rather than seniority. Others plan to cut salaries for starting associates, just two years after top firms raised pay to compete for talent.
“In the current economic crisis, we see the final demise of the medieval guild in the American legal profession,” said Joel Henning, a law firm consultant at Hildebrandt International Inc.
Law firms have operated for decades with associate pay structures that don’t reward performance, Henning said. The industry’s retooling comes as dozens of firms including DLA Piper, the world’s second-largest law firm with 3,700 lawyers; Latham & Watkins LLP; White & Case LLP; Holland & Knight LLP and Orrick, have collectively terminated thousands of attorneys.
“One of the best things firms are doing is breaking the ridiculous lockstep structure of associate compensation,” Henning said. “There is no other profession that operates that way.”
Orrick is a 1,100-attorney firm based in San Francisco whose clients include Wells Fargo & Co., the third biggest U.S. bank by deposits, and PG&E Corp., California’s largest utility owner. The firm said it plans to discard guaranteed raises to associates in July. It has fired lawyers twice in the past year, including 100 this month and 40 in November.
Associate pay increases will be based on merit, not just on seniority as has been done throughout the legal industry, Orrick Chief Executive Officer Ralph Baxter said in an interview.
The firm originally intended to introduce the change next year. It decided to switch in July because of the deterioration of the economy, Baxter said.
Orrick will also introduce new tiers of associates, or salaried lawyers, replacing the traditional single-track system where some become partners who share in the firm’s profits after about eight years, Baxter said. Under the new structure, associates will be able to stay at the firm permanently, drawing salaries, he said.