Pay Parity Across Legal Markets: Multiple Perspectives

Editor's Note: This article focuses on how firms justify compensation adjustments, or the lack thereof, for branches in different geographic areas. This important aspect of compensation was alluded to indirectly in several of our recent articles on associate compensation, but the same concern obviously applies more broadly. My guess is that some readers have supplemented their general concerns about fairness, morale and competitiveness with serious mathematical modeling; I invite these readers to share their thoughts with other A&FP readers. (Reach me at [email protected].)

As firms across the country lift associate salaries, some are opting to pay the same in all U.S. offices outside New York, while others still pay less in secondary markets like Philadelphia, Atlanta or Miami.

Approaches to Salary Structure

Those with the one-salary-fits-all approach ' such as Gibson, Dunn & Crutcher and Morrison & Foerster ' tend to be mostly in larger markets and argue it's necessary as practices become integrated across markets. But some firms, especially those with lots of U.S. offices, see no need ' so far, anyway ' to pay top dollar in places such as Pittsburgh and Detroit.

For example, Foley & Lardner recently unveiled a new salary structure, matching the new $135,000 market rate in major markets but paying $115,000 in several smaller cities. In those offices, the overall economics and billing structures aren't as robust, Chairman Ralf B'er says. Even so, the firm ' with offices in places like Detroit; Tallahassee, FL; and Madison, WI ' is considering adopting a one-scale model, a decision that will likely be made during the next few years, he says.

“As more and more attorneys practice nationally, the rate constraints that may exist in their home office may disappear,” B'er says, at least when they are working on national matters. “The more we succeed in integrating, the more the reason for salary differences, based on some markets having lower hourly rates, disappears over time.”

Other firms are already there. Morrison & Foerster, for example, pays associates the same in Denver as it does in Palo Alto, CA. Chairman Keith Wetmore says there may be a case for paying less in smaller markets. But it can create complaints, because Denver associates may be working on the same matters as their Palo Alto counterparts.

“Given how integrated practices are across offices, and how much people temporarily relocate for a case, we find that changing salaries between markets creates disaffection and unhappiness,” Wetmore says, explaining why the firm changed its pay structure 5 years ago.

Gibson Dunn, too, pays the same scale ' $135,000 to start ' in secondary markets such as Denver and Dallas.

But when Paul, Hastings, Janofsky & Walker raised pay recently, Atlanta first-years remained $20,000 behind. “Our goal is to pay associates in each market the top of that market,” says Paul Hastings Chairman Seth Zachary. “I think associates understand our firm's philosophy.”

Zachary says the firm doesn't undertake a cost-of-living analysis, but rather studies the competitive situation in that market.

Firms that follow the one-salary model are an elite group of firms that are often only in top markets and can't afford to pay less there, says consultant Peter Zeughauser. “Other firms can afford to pay less in second-tier markets,” he says. “There are some markets that even for the best talent, you don't have to pay top associate salaries because there is enough talent to meet the demand.”

If more and more national firms adopt the one-salary approach, it could have a significant impact on firms, such as Reed Smith, that have lots of associates in secondary markets. Reed Smith, which hasn't raised salaries this year, pays first-years from a low of $100,000 in Richmond, VA, to a high in New York and Los Angeles of $125,000. “I cannot foresee going to a flat national salary because it would not make business sense,” says Reed Smith chief human resources officer, Michael Lynch. “You'd end up significantly overpaying or significantly underpaying, and that's not good for business.”

Robert Fortunato, a Southern California-based legal consultant, says pay should be market driven, “because the cost of living is radically different” from one city to the next. “If you pay everyone what you're paying in New York,” Fortunato says, “you're leaving money on the table.”

Even the firms that subscribe to the across-the-board model make an exception for New York, however. Most of the firms have historically paid their New York associates more, at least those in the senior classes.

International Variations

As the top firms focus overseas, setting associate pay is becoming an even more complicated chore. Most firms say they use a hybrid model that tries to mesh market conditions in a particular international city with the firm's overall salary structure.

While meaningful comparisons can be hard to come by, firm leaders say that in general, associate salaries are highest in the United States.

Reed Smith's Lynch says that starting associate pay in Munich is about 60,000 to 65,000 euros, or about $75,000, a competitive salary there, Lynch says.

The starting pay for elite firms in London is about 50,000 pounds, or $88,000, according to Jeremy Schrire, a partner in SJ Berwin's London office. American firms there tend to pay higher, which one firm leader says was necessary to compensate lawyers for the “risk” of working for a U.S.-based firm.

In developing markets such as Eastern Europe, salaries may be significantly lower than in the United States, but the lower cost of living allows lawyers to “live like a king,” one firm leader says.

American lawyers working overseas often receive an “ex-pat” package, which sweetens the deal with housing and cost-of-living adjustments if applicable. Local hires won't receive that arrangement.

The U.K. firms are watching closely to see if the U.S. salary hikes move east, though Schrire predicts the effects will be marginal. The competition isn't as direct since many of the U.K. firms have the home-team advantage, and salary often isn't enough to lure them to American firms. “We will start to move when the market says we have to,” he says.

Market Convergence

As markets converge, some experts predict the salaries will flatten, though others insist distinctions are inevitable. “Even though there are efforts to integrate work, there are going to be some lawyers and clients who want work handled by local lawyers,” says legal recruiter Larry Watanabe.

But Zeughauser points out that limited pool of talent might drive up prices even in smaller markets for firms determined to attract the best. “The demand is outstripping supply,” he says. “It's just a matter of time before it converges.”

Editor's Note: This article focuses on how firms justify compensation adjustments, or the lack thereof, for branches in different geographic areas. This important aspect of compensation was alluded to indirectly in several of our recent articles on associate compensation, but the same concern obviously applies more broadly. My guess is that some readers have supplemented their general concerns about fairness, morale and competitiveness with serious mathematical modeling; I invite these readers to share their thoughts with other A&FP readers. (Reach me at [email protected].)

As firms across the country lift associate salaries, some are opting to pay the same in all U.S. offices outside New York, while others still pay less in secondary markets like Philadelphia, Atlanta or Miami.

Approaches to Salary Structure

Those with the one-salary-fits-all approach ' such as Gibson, Dunn & Crutcher and Morrison & Foerster ' tend to be mostly in larger markets and argue it's necessary as practices become integrated across markets. But some firms, especially those with lots of U.S. offices, see no need ' so far, anyway ' to pay top dollar in places such as Pittsburgh and Detroit.

For example, Foley & Lardner recently unveiled a new salary structure, matching the new $135,000 market rate in major markets but paying $115,000 in several smaller cities. In those offices, the overall economics and billing structures aren't as robust, Chairman Ralf B'er says. Even so, the firm ' with offices in places like Detroit; Tallahassee, FL; and Madison, WI ' is considering adopting a one-scale model, a decision that will likely be made during the next few years, he says.

“As more and more attorneys practice nationally, the rate constraints that may exist in their home office may disappear,” B'er says, at least when they are working on national matters. “The more we succeed in integrating, the more the reason for salary differences, based on some markets having lower hourly rates, disappears over time.”

Other firms are already there. Morrison & Foerster, for example, pays associates the same in Denver as it does in Palo Alto, CA. Chairman Keith Wetmore says there may be a case for paying less in smaller markets. But it can create complaints, because Denver associates may be working on the same matters as their Palo Alto counterparts.

“Given how integrated practices are across offices, and how much people temporarily relocate for a case, we find that changing salaries between markets creates disaffection and unhappiness,” Wetmore says, explaining why the firm changed its pay structure 5 years ago.

Gibson Dunn, too, pays the same scale ' $135,000 to start ' in secondary markets such as Denver and Dallas.

But when Paul, Hastings, Janofsky & Walker raised pay recently, Atlanta first-years remained $20,000 behind. “Our goal is to pay associates in each market the top of that market,” says Paul Hastings Chairman Seth Zachary. “I think associates understand our firm's philosophy.”

Zachary says the firm doesn't undertake a cost-of-living analysis, but rather studies the competitive situation in that market.

Firms that follow the one-salary model are an elite group of firms that are often only in top markets and can't afford to pay less there, says consultant Peter Zeughauser. “Other firms can afford to pay less in second-tier markets,” he says. “There are some markets that even for the best talent, you don't have to pay top associate salaries because there is enough talent to meet the demand.”

If more and more national firms adopt the one-salary approach, it could have a significant impact on firms, such as Reed Smith, that have lots of associates in secondary markets. Reed Smith, which hasn't raised salaries this year, pays first-years from a low of $100,000 in Richmond, VA, to a high in New York and Los Angeles of $125,000. “I cannot foresee going to a flat national salary because it would not make business sense,” says Reed Smith chief human resources officer, Michael Lynch. “You'd end up significantly overpaying or significantly underpaying, and that's not good for business.”

Robert Fortunato, a Southern California-based legal consultant, says pay should be market driven, “because the cost of living is radically different” from one city to the next. “If you pay everyone what you're paying in New York,” Fortunato says, “you're leaving money on the table.”

Even the firms that subscribe to the across-the-board model make an exception for New York, however. Most of the firms have historically paid their New York associates more, at least those in the senior classes.

International Variations

As the top firms focus overseas, setting associate pay is becoming an even more complicated chore. Most firms say they use a hybrid model that tries to mesh market conditions in a particular international city with the firm's overall salary structure.

While meaningful comparisons can be hard to come by, firm leaders say that in general, associate salaries are highest in the United States.

Reed Smith's Lynch says that starting associate pay in Munich is about 60,000 to 65,000 euros, or about $75,000, a competitive salary there, Lynch says.

The starting pay for elite firms in London is about 50,000 pounds, or $88,000, according to Jeremy Schrire, a partner in SJ Berwin's London office. American firms there tend to pay higher, which one firm leader says was necessary to compensate lawyers for the “risk” of working for a U.S.-based firm.

In developing markets such as Eastern Europe, salaries may be significantly lower than in the United States, but the lower cost of living allows lawyers to “live like a king,” one firm leader says.

American lawyers working overseas often receive an “ex-pat” package, which sweetens the deal with housing and cost-of-living adjustments if applicable. Local hires won't receive that arrangement.

The U.K. firms are watching closely to see if the U.S. salary hikes move east, though Schrire predicts the effects will be marginal. The competition isn't as direct since many of the U.K. firms have the home-team advantage, and salary often isn't enough to lure them to American firms. “We will start to move when the market says we have to,” he says.

Market Convergence

As markets converge, some experts predict the salaries will flatten, though others insist distinctions are inevitable. “Even though there are efforts to integrate work, there are going to be some lawyers and clients who want work handled by local lawyers,” says legal recruiter Larry Watanabe.

But Zeughauser points out that limited pool of talent might drive up prices even in smaller markets for firms determined to attract the best. “The demand is outstripping supply,” he says. “It's just a matter of time before it converges.”