|Oregon State Bar Bulletin MAY 2007|
By Cliff Collins
Big New York City law firms set the national pace for salary raises, and first-year associate salaries are a standard measure for the legal economy all over.
These two axioms were in stark evidence in the first part of 2007, as Big Apple giants kicked off the new year by shaking things up more than they have been in several years.
Many large firms hiked starting pay
to $160,000 — up by $15,000 to $25,000 from a year ago — and
the falling dominos reshaped the landscape within a week.
Firms in other large markets, and firms across the country that have branches in the city, quickly followed suit. The West Coast, the Northwest and Oregon have not been spared, either.
"It definitely affects us," says John A. Cameron, hiring partner for Davis Wright Tremaine. "There’s a ripple effect to bigger cities first. It radiates to big firms everywhere." Davis Wright has other offices in New York, Los Angeles, Washington, D.C., San Francisco, Seattle, Bellevue, Anchorage and Shanghai, China. The firm’s salaries are not the same in each city, but all are affected when New York moves up first-year compensation, he says.
Large firms here, whether they have East Coast offices or not, compete for much the same pool of top law school graduates as do New York and other metropolises.
"A law firm’s best assets are its lawyers," says Steven M. Hedberg, Portland managing partner for Perkins Coie. "We’re always competing for the best and the brightest. We have felt New York." When New York made changes, Perkins did, too, with raises retroactive to Jan. 1. "If you’re competitive nationally, you’re competing with New York, Los Angeles, Seattle. The new lawyers are looking at all the markets," he says.
"It does impact things," agrees Mark A. Long, managing partner of Schwabe, Williamson & Wyatt. "These are salaries that are driven by firms that have significant numbers (of lawyers). The number of graduates attracted to these large firms has risen, while the overall number has not. Law students here have options they might not have in the past."
The number of associates at "National Law Journal 250" firms increased 76 percent from 1996 to 2006, while the number of law school graduates climbed just 7 percent during that period.
What’s more, the increase at the first-year level necessarily affects the salaries for the rest of the firm. "An increase for first-years results in an increase for standards for all levels," says Davis Wright’s Cameron. Obviously, it would create a lot of internal turmoil if firms didn’t adjust others’ salaries, he says.
The effect also is felt when a Portland firm based in a larger city than any in the Northwest raises salaries at all of its offices. New York starting salaries were $135,000 to $145,000, but since January many now are $160,000. Big California firms moved up first-year pay to $145,000 or more. Heller Ehrman, based in San Francisco, raised its Seattle office’s first-years from $120,000 to $130,000, retroactive to Jan. 1.
Portland Salaries Rise
Portland still is well behind those numbers, but has upped first-year pay all the same. Last year, Perkins Coie was paying $95,000, "with a guaranteed bonus of $10,000," says Hedberg. The firm’s starting salary has gone up this year to $105,000, with a $5,000 guaranteed minimum bonus. Perkins Coie starts giving bonuses at 1,850 billable hours, including 50 pro bono hours. Associates can make larger bonuses if they increase hours and make "high-quality, meaningful contributions," he says.
In Perkins Coie’s Seattle office, first-year associates who bill the minimum 1,850 hours will see a rise from $110,000 last year to $120,000. For associates who work 2,000 billable hours per year, compensation will be $140,000.
Wally E. Van Valkenburg, managing partner of the Portland office of Stoel Rives, says the firm on Jan. 1 raised first-year salaries from $95,000 to $105,000, "based on our assessment of the market conditions. We try to see what our markets are like. We have traditionally been lower than the California markets." He says that trying to control costs and not pass along costs to clients is "a tough situation."
"We try to set our rates in light of what we know of the competition. Our competition is in different regions. We also have to keep in mind that we can’t charge rates that our clients don’t consider reasonable."
Stoel Rives’ billable hours target has been 1,800 the past five years for associates to qualify for a 10 percent bonus of their base salary. "Some who don’t still get a discretionary bonus," and the firm hasn’t changed this formula in relation to the raise in salaries, Van Valkenburg says.
What the biggest firms such as Perkins Coie and Stoel Rives do has more of an effect on smaller large firms than what New York does, says Schwabe’s Long. "We compete directly" with those Portland firms for the same people, he says.
Schwabe’s starting salaries for this fall will be $96,000 "or a little over," subject to review, he says. "We always want to keep an eye on what our markets are doing."
Davis Wright’s Cameron says, "We increased fourth-quarter last year for this coming year. There is certainly a rising tide on salaries, and we find ourselves constantly reassessing."
Erica Daley, chief financial officer of Miller Nash, says Portland firms that have offices in New York and other cities have felt pressure to raise salaries in all their firms. Daley says her firm gets the same pressure from within, with associates asking, "Why are you paying more to Seattle lawyers when I am doing the same amount of work?"
She answers that firms have to pay associates based on the market they are in, because rates charged to clients are lower in smaller cities than large.
Associate-level billing rates haven’t increased to clients at the same rate as have associate salaries, she adds. "We have increased those salaries for the last several years. The last two fiscal years have been larger increases." In addition, "Clients are consolidating the number of firms they’re working with. We’re getting squeezed from both sides."
Whither Oregon’s Competitive Advantages?
At the same time, some new law school graduates may perceive the traditional advantages of working in Oregon as eroding. Law firms here long have touted as selling points the quality of life, the opportunity for advancement to partner, the comparatively lower number of billable-hour requirements, and the opportunity for better work-life balance.
But if compensation keeps rising, hourly expectations may follow, as they have in larger markets. Right now, first-year associates in the Northwest often are required to work between 1,800 and 1,900 billable hours annually, while large firms in New York expect first-years to work as much as 2,200 to 2,300 a year, says Linda Green Pierce, president of Northwest Legal Search.
But among "the pressures that happen to firms when salaries go up are that the partners feel associates should bill more hours for those dollars. Associates may feel they are already billing enough, or say, ‘We didn’t come to Portland, or remain in Portland after law school, to bill more hours,’" she says.
Green Pierce adds that Portland’s continued increases in home costs have not helped the equation. New associates coming to Oregon in many instances will want to buy a home. With the median home price in January for Portland at $275,000, as opposed to even a year ago, when it was around $240,000, associates are not as able to buy a house on Portland salaries, she says. Moreover, many graduates leave school with large debts to repay, and may look twice at markets where they can make higher salaries.
Stoel Rives’ Van Valkenburg says some new lawyers "have to make hard choices." They may have to take jobs with salaries of $20,000 to $30,000 more to help pay off their debts. "Then we may see them in a couple of years," he says.
Perkins Coie’s Hedberg and others contend that if the cost of living in Oregon versus New York is taken into account, "the compensation is roughly the same."
Moreover, some national analysts have pointed out that raising salaries, then expecting more hours in return, is exactly what young associates do not seek. Instead, many have rebelled at having to work night and day, and feel they have no life outside of the office.
"Certainly one of the attributes we use as a selling point is, we try to offer a balance of life," says Davis Wright’s Cameron. "Turnover is endemic to the industry, a reaction across the country to the demands placed on them. We, by being more moderate in demands, have an edge in that lifestyle comparison."
Schwabe’s Long concurs. "Some people with pretty good talent are leaving New York City," he says. Portland is within a five-hour drive of virtually any outdoor recreational opportunity imaginable. "That certainly has appeal to people, people with affinity for place."
Better Life Balance
Quality of life as a recruiting pitch is of even greater necessity for Oregon firms outside the Portland area. Gerry Gaydos, of Eugene’s Gaydos, Churnside & Balthrop, says the factors that attract lawyers to practice in smaller areas — or deter them from doing so — remain constant, and serve as a counterbalance to what is happening with salaries in Portland or New York.
"We really sell lifestyle," says Gaydos, an Ohio native who sought out a small community in which to practice. The hourly rates he and the four lawyers associated with his firm can charge in Lane County cannot be as high as what Portland lawyers command, because local industry could not sustain it.
But by living in a university town, "you get a lot of the larger-city benefits without being in a larger city." Even if Gaydos’ firm could pay lawyers top dollar, the type of candidates who would be drawn to Eugene would have to be comfortable being more generalists than specialists. "If they’re driven by money needs," or want to specialize as they could in a larger firm, Eugene would not work for them, he says.
Lynn R. Nakamoto, managing shareholder of Markowitz, Herbold, Glade & Mehlhof, a 14-lawyer boutique litigation firm in Portland, typically doesn’t hire lawyers who are right out of law school, but looks for midlevel associates with complex litigation experience.
"We have the opportunity to compete for experienced associates
in town and out of town. That’s where there is some effect" from
the salary-increase wave,
Big Portland firms "often pay large initial salaries to compete, but the raises get pretty small" after the first year, says Nakamoto. "Others of us are able to take advantage of that experience" if associates later decide to go to a different firm.
"Work and personal-life balance — sometimes small firms will offer that and more experience in the courtroom, and more well-rounded litigation experience." Associates take into account a host of factors when deciding where to work, including the people they’re going to work with and the kind of cases they’re going to get, she says.
The Immediate Future
Salary pressures likely will get worse before they get better. Ward Bower of Altman Weil told Law.com that first-year salary increases are due, in large part, to an imbalance in the supply and demand of law school graduates: "‘AmLaw 200’ firms will add an average of 50 new associates this year, or a total of 10,000. Of about 40,000 law school graduates each year, only a small percentage of that number constitute the best students top firms seek."
"It’s the continual competition for the best and the brightest," adds Northwest Legal Search’s Green Pierce. "Only so many of those lawyers graduated in the top of their class, and only so many of them are willing to work in a law firm of hundreds or thousands of lawyers and bill thousands of hours a year. The competition for those people is keen."
Many who finish law school never go into private firms, she points out. A good percentage choose to practice in public defenders’ or district attorneys’ offices, or in city, county, state or federal government. Others go into large corporations’ legal departments as entry in-house counsel. Some may go into private banking or become a lawyer in a private equity fund, securities brokerage house, venture-capital firm or hedge fund. A few graduates do not practice law at all.
"Some who are highly placed academically, and who could easily go to Big Law, go instead to Wall Street," Green Pierce says. "Wall Street has been paying a lot more money than even the largest and highest-paying law firms."
Altman Weil’s Bower says the big New York firms will continue to boost salaries in the next few years, a phenomenon that he thinks will create several tiers of law firms, where the highest-paying New York firms will get the top talent and other firms will realize they can’t continue to match the market leaders.
Firms’ unwillingness to reduce partners’ profits, in addition to client concerns about salary increases, eventually will create firm tiers nationally and by market in terms of compensation, he predicts.
ABOUT THE AUTHOR
Cliff Collins is a Portland-area freelance writer and a frequent contributor to the Bulletin.
© 2007 Cliff Collins