The Tides Are Turning on Associate Compensation

By Paul Southwick, Davis Wright Tremaine and YLS Futures Committee member.

Gone are the days of rapid increases in associate compensation. Over the course of the mid-2000s, law firms felt pressure to compete for top associate talent and responded by increasing salaries significantly. New York starting salaries for the largest firms moved from $125,000 in 2005 to $160,000 in 2007. Law firms made similar increases in the Portland market, with the highest paying firms topping out first year associate salaries around $120,000. Law firms, however, no longer treat associate compensation like it's 2007. In addition to implementing salary freezes and reductions, several Portland law firms crafted a new, merit-based framework for determining associate compensation.

In the past, most large law firms used a lockstep model of compensation. Firms paid associate salaries based on seniority, providing automatic, annual salary increases and paid bonuses largely based on hitting billable hour targets.

In a merit-based model, however, firms compensate associates based on their performance. They utilize a three-tiered structure, designating associates as junior, mid-level or senior associates. Within each tier, salary differences are minimal. To move to the next tier and thereby receive a substantial salary increase, associates need to meet performance expectations. These expectations cover many areas, such as legal writing and analysis, time management, teamwork and community involvement. Similarly, firms will give more emphasis to these discretionary, merit-based factors in determining bonuses.

These changes to the associate compensation model have spawned associate concerns. They are concerned about the vague nature of the performance expectations that now determine their compensation. Ambiguous performance expectations create difficulties for associates who are trying to measure their success or predict their total pay. Moreover, some associates worry that vague performance expectations provide partners a means of reducing associate compensation without explicitly acknowledging it.

Given these concerns, firms should consider incorporating the following three elements into the merit-based compensation framework: 1) clear, measurable performance expectations, 2) meaningful, routine feedback from partners, and 3) transparency regarding compensation figures. Clear, measureable performance expectations make it easier for associates to focus their efforts, and provide them with a sense of control over their professional development. Meaningful, routine feedback from partners gives associates information about where they are succeeding, where they are failing, and how they are likely to be compensated for their performance.

Additionally, transparency regarding compensation figures enables associates to measure their success and predict their total compensation. Under the new model, associates do not know how much the firm is compensating their peers and consequently, whether their own compensation indicates they are meeting performance expectations. To assist associates with this evaluation, firms could annually publish the high, median and low total compensation for associates in each of the three tiers, an idea already implemented by Orrick, Herrington & Sutcliffe. By comparing their compensation to these figures, associates can measure their success at the firm.