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Improving Compensation Decisions in a Mixed Economy

By James D. Cotterman

This year's annual ritual of dividing income is over now for most law firms. This round of decisions affects 2009 income and 2010 base or positioning in a prospective program. A year ago, the profession was quite anxious about the economy (legal and otherwise) and their personal financial futures. It was analogous to being boxed in with pressure being asserted on all six sides simultaneously ' a severely depressed economy, ultra tight credit markets, skittish partners reluctant or unable to contribute capital, price-sensitive clients under their own cost reduction imperatives, intractable landlords and facility leases, and competitive approaches by firms less severely affected by the downturn. The profession responded with serial layoffs, furloughs, reduced hours, wage freezes and reductions. Non-wage expenditures were scrutinized like never before. The medicine, while bitter, largely worked, although aided by an economy that finally found its bottom. Yet the recovery is not complete as the effective unemployment rate remains frustratingly high.

However, again like the economy, not all is right in the legal profession. Law firms struggle with competing interests of survival versus preservation of long-held values. One long-held value beginning to fall is the lock-step compensation arrangement for associates. Rightly or wrongly, it is giving way to “merit” based approaches where pay is tied to skills, competencies, and contributions. Another mainstay at risk is the role of recent law school graduates in law firms. Client push back on paying for first and second year associates has brought about renewed interest in apprenticeships. This is a worthy, albeit expensive, proposition for firms and associates alike. Firms continue their evaluation of partners ' equity and non-equity alike ' striving to maintain the key players for what they expect (some might say hope) to be the dominant post-recession practices.

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