Even bigger bucks for fresh batch of lawyers

Pity the poor first-year lawyer in Philadelphia.

The hours are long, the work often tedious, the regard of senior staff sometimes condescending.

But for sure there are compensations.

Starting with the compensation.

In September, starting salaries at some Philadelphia law firms will reach an all-time high of $145,000 a year for lawyers fresh out of law school. That follows a round of steep increases last year and comes amid fresh signs that clients - who pay the bills - may start to push back.

Partners at some of the big firms regard the salary spiral with the same sense of awe and dread that analysts had of the Internet bubble of the late 1990s: helpless astonishment at the soaring numbers, combined with a nagging sense that it could end badly.

"My own feeling is, I don't think it is a positive development," said Robert Reinstein, dean of Temple University Law School, which places many of its graduates in Philadelphia firms. "It works right now because the economy is so strong, but everyone knows the business cycle has not been eliminated. So when we get into a recession, what will happen will be a repeat of what happened in earlier times, which is a lot of associates will get laid off."

Driving the salary increases, both in Philadelphia and nationwide, is a thriving national economy and an abundance of litigation and transactional work. With huge sums hinging on the outcome of a deal or a court case, clients infrequently balk at paying between $200 and $300 an hour for the time of first-year associates.

But they are starting to complain.

In a survey of major corporate legal departments by Altman Weil, the Newtown Square consultant to law firms, 58 percent of respondents said starting salaries for young lawyers were "outrageous." Each of the 38 respondents said they had never been contacted by their law firms to discuss starting salaries for new lawyers.

Some of the comments of the survey respondents were scathing.

"This shows indifference to clients, who, unlike hedge funds, have budgets to meet," said one corporate lawyer.

The billing rates for first-year lawyers are moneymakers for law firms. Associates are typically expected to bill clients for 1,900 hours or more a year - about 38 hours a week - nearly a half million in revenue generated by one young lawyer.

Of course, a big chunk of that goes to pay for support staff and overhead such as huge information-technology costs. Some of it is uncollectible or not billed. But even by the most conservative yardstick, the bottom line is still favorable to the firms.

Young associates are under pressures of their own; many need high salaries simply to pay off the big loans they took out to pay tuition. At Temple, the average is about $60,000, Reinstein said.

Rising salaries for first-year associates have a cascading effect, since firms typically raise salaries at the same time for more senior associates as well.

All of this has created pressure on firms and on young lawyers that simply didn't exist a few years ago, when the economy was soft and there was less pressure to raise salaries.

"While we would like to lead in a lot of areas, this [first-year associate salaries] is not one of them," said Eric Kraeutler, firmwide director of recruiting for Morgan, Lewis & Bockius, a Philadelphia-based firm with more than 1,200 lawyers. We want our associates to know that we really value them, but there is also some sensitivity among clients; they see these levels of compensation and they have a stake in it."

Arthur Makadon, chairman of Ballard Spahr, a 500-lawyer firm based in Philadelphia that plans to raise starting associate salaries from $125,000 to $135,000, said firms had little choice if they wanted to compete for top graduates.

Yet he said he doubted lawyers fresh out of law school were worth the salaries they commanded.

Does the frenzy to raise associate salaries give young lawyers an exaggerated sense of their own worth?

"I could answer that question, but I won't," Makadon said.

Jerome Shestack of WolfBlock, a former president of the American Bar Association, said some firms tried to avoid passing the costs along to clients by limiting increases in salaries for junior partners.

For most midsize to large firms, the wooing of entry-level lawyers begins after the first year of law school. Recruiters swarm campuses, promoting not only their compensation packages but also their firms' work environment.

Summer interns are paid at the rate of first-year associates – between $2,500 and $2,800 a week in Philadelphia; in New York, it is even higher, up to $3,200 a week at the biggest firms.

Once they arrive, the interns are treated to a round of receptions, dinner parties and even trips. The offerings sometimes sound like summer enrichment programs for precocious high school students on their way to the Ivy League.

Dechert says on its Web site that it will tailor work assignments to match interns' interests; each summer associate also is assigned a mentor.

After hours sounds pretty good, too.

"Outings to museums, partners' homes, sporting events, and restaurants are just a few examples of ways in which summer associates get to know their colleagues and the cities we're in," says the pitch on Dechert's Web site. "A trip to our London office has been a highlight of our summer program."

All the while, summer associates typically work fewer hours than the full-time staff. So great is the pressure on firms to keep their associate pipelines full that the vast majority of summer interns are offered full-time positions when they graduate.

Some of Philadelphia's midsize firms - firms that offer lower starting salaries to first-year associates than the bigger firms - try to sell themselves by focusing on the work environment at the firm - associates will get more responsibility and interesting work, and benefit from a more collegial, less cutthroat environment, they contend.

"Certainly there is pressure to keep our salaries competitive, but we don't feel we have to be in the top tier of salaries," said Nancy Winkelman, the hiring partner at Schnader Harrison, which upped starting salaries $10,000 this year to $135,000. "We are not losing students who we make offers to based on a $5,000 to $10,000 differential. If they do their homework, they are going to appreciate that there are factors at Schnader that more than compensate for the difference in salaries."

Winkelman said the fact that many Schnader lawyers had spent their careers at the firm was a top selling point.

Still, the question of what happens if there is an economic downturn looms large.

"I'm nervous about what happens when a recession hits," said Reinstein of Temple Law School. "All of this can work well when the economy is doing fine, especially the portion of the economy that law firms deal with, when Wall Street is very active and there is a lot of corporate business.

"Big law firms prosper because they and only they have the resources to handle these matters. What happens when that dries up?"