It figures that a new partner ought to be making a lot more than a senior associate. After all, a move into the partnership rewards years of hard work, and it comes with a whole new set of responsibilities to the firm.
But the most recent round of associate pay hikes has edged senior associates ever closer to junior partner pay rates. In fact, in some cases, senior associates can come out ahead of partners -- particularly if the firm has a nonequity tier.
Here's just one example: At Arent Fox, Chairman Marc Fleischaker says senior associates can earn as much as $280,000 in base salary and -- if they meet targets for generating business -- an additional $100,000 in bonuses. Total: $380,000. First-year nonequity partners start off with a pay rate of $310,000. But they subtract $20,000 to cover their own benefits. Their total: $290,000.
Fleischaker says that, while it's true that some associates could earn more than partners, "it doesn't bother us, and we've never heard a complaint." Nevertheless, the firm has tried to do something about it. Last year, Arent Fox added $50,000 in stock and at least a $27,000 bonus to help shore up salaries for partners at the low end of the pay scale. New total: $367,000 -- still not as much as the highest-earning senior associate, but, certainly, a vast improvement. "If you take what they actually made this year, the compression is not that serious," Fleischaker says.
Salary compression -- in other words, the narrowing of the gap between what senior associates and junior partners make -- has been an annoyance for junior partners and a problem for big firms for years, consultants and partners say. Ideally, consultants say, the difference between associate and partner compensation should be at least 20 percent. But the most recent pay hikes for associates aren't helping matters. Suddenly, a senior associate isn't gaining all that much -- at least financially -- by moving into a partner role.
A few firms are putting together bonuses and new pay scales to help remedy matters. "I told my partners last year, the younger partners had to be moved up," says Richard Wiley, managing partner at Wiley Rein. "Partners have to feel like they're adequately compensated." Wiley declined to comment on exact numbers, but partners at the firm placed the new-partner salaries at around $320,000, with senior associates making around $270,000.
But every dollar spent trying to increase a junior partner's salary comes out of a more senior partner's pocket. And firms that don't want to tap the profit pool to ease compression are left with a few unappetizing choices: "You can pay associates less and be less competitive or cut other overhead," says Peter Zeughauser, a legal consultant with the Zeughauser Group. The easiest way to trim overhead at a multitiered partnership, he adds: Fire nonequity partners.
It's the extras that partners pay for that can drastically reduce compensation. For equity partners, it's a capital contribution that can reach six figures. Nonequity partners often pay for their own health care, disability and Social Security expenses (that alone can take away roughly $6,000). The silver lining is that firms put more into a partner's retirement plan than they do for associates.
Hogan & Hartson responded to the compression issue last year by raising salaries. "We went ahead and adjusted the base compensation of our more junior partners to be sure they would be paid more highly than associates," says Chairman J. Warren Gorrell Jr.
Hogan & Hartson pays senior associates a base salary of roughly $280,000. Junior partners in the firm's Washington office make roughly $400,000 annually. Gorrell adds that in recent years, Hogan & Hartson has also moved more of the base pay for junior partners into annual salary rather than holding money back for end-of-year bonuses, so lawyers know what to expect in compensation.
Ward Bower, a consultant at Altman Weil's Newtown Square, Pa., office, says firms that matched associate pay in the salary wars are struggling to keep partners happy. "What they really want to protect is the income of their biggest partners," Bower says, "which means the partners at the bottom of the scale are caught in a tough position."
Making that position all the more untenable is the economy, hobbled by subprime-lending woes and what lawyers say is a slowdown in mergers and acquisitions. The Citi Private Bank's Managing Partner Confidence Index survey released earlier this month showed pessimism about this year's profits, bad news for any junior partner looking for firms to do more about their pay rates.
Headaches over compression go back generations, consultants say, with smaller, less profitable firms especially hard-hit. That's because the market determines associate salaries, but profits determine partner pay. And the two don't always match up.
For big law firms, compression between the associate and partner ranks was first put on the front burner at the end of 1999, when Gunderson Dettmer Stough Villeneuve Franklin & Hachigian raised first-year associate salaries to $125,000. The hike from the Silicon Valley-based firm soon affected Washington. Firms in town bumped pay roughly $25,000 to match West Coast salaries.
The past two years have brought another spate of increases, this time initiated by firms in New York. Since 2004, most of the leading Washington firms jumped up from $125,000 to the current market rate of $160,000 for first-year associates.
That jump increasingly cut into partner profits.
For example, 10 years ago, first-year associates at Patton Boggs earned $80,000. In 2006, they earned $125,000, an increase of 56 percent. Adjusted for inflation, the growth in associate compensation was about 21 percent. At the same time, according to Am Law 200 data, profits for all partners at Patton Boggs grew from $330,000 in 1998 to $580,000 in 2006, an increase of 76 percent. Adjusted for inflation to 2006, the 1998 profits were $408,000 in 2006 dollars, still an increase of 42 percent, keeping ahead of associate compensation. But in the past two years, associate pay has jumped to $160,000, an increase of 28 percent.
Stuart Pape, managing partner at Patton Boggs, says the hike in associate pay has, historically, come in waves. "It does take firms a bit [of time] to adjust, and most of us have done that successfully," Pape says.
For more profitable firms, like Hogan & Hartson, which paid associates a base salary of $88,000 in 1998, the raises have been slightly less painful (associate pay was at $125,000 in 2006). Partner profits grew from $425,000 in 1998 to $770,000 in 2006, a gain of 81 percent. Adjusted for inflation, the 1998 profits were $525,000 in 2006 dollars, meaning profits increased by 47 percent.
"Usually, firms that have this problem have other problems," Zeughauser says about compression. "Either their rates don't support hiring associates at that level any longer, or they have too many lawyers that are not productive enough."
Having unproductive partners, consultants say, is more common at two-tier firms. Single-tier partnerships, such as those at Covington & Burling and Wilmer Cutler Pickering Hale and Dorr, have benefited from exclusivity, annually electing fewer lawyers to the partnership than firms with multiple tiers. Wilmer pays young partners roughly $475,000 in base salary. Top senior associates there make about $280,000.
"It has not been an issue," says William Perlstein, co-managing partner of Wilmer Cutler. "The only time that it's even close is when someone comes in as counsel and they end up getting paid reasonably close to what a first-year partner is getting."
Having a multitiered partnership has allowed many firms to increase leverage while not forcing partners out if they failed to make equity status. But it's also had the unintended effect of creating a large cadre of less profitable lawyers who have no place to go, says Ed Wesemann, a consultant with Kerma Partners. And that will only get worse for nonequity partners if the economy continues to dip.
"If we are facing a recession, then you're going to see a natural excuse to get rid of lower-end partners," Wesemann says. "You're going to see partners laid off."