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May 7, 2009 2:32 PM

Will Pay Cuts Hit New York?

Posted by Nate Raymond

As law firms nationally cut back salaries, eyes are now turning to New York to see if the city that pushed associate pay to unprecedented levels will start slicing checks too.

Two years ago, New York firms raced to match the $160,000 starting salary set by Simpson Thacher & Bartlett. Law firms in other states soon followed. Now, after more than a dozen firms nationally have cut salaries to pre-2007 levels, a few New York law firm chiefs say they're mulling over doing the same--if a big NYC firm does so first.

At least two heads of New York law firms say they would consider reducing associate salaries. But the firm leaders, who requested anonymity to openly discuss the matter, say they're unlikely to make those cuts unless a firm traditionally considered a market leader in setting compensation levels does so first. Among the firms they're keeping an eye on: Sullivan & Cromwell, Cravath, Swaine & Moore, Simpson Thacher, and Davis Polk & Wardwell.

Yet not all New York firms are following tradition. Two weeks ago, Chadbourne & Parke said it was reducing associate and staff salaries by an undisclosed amount. Lawyers there will be eligible to make up for the difference in the form of a performance-based bonus at the end of the year, the firm said. Other firms based outside of New York City have likewise cut salaries, including Nixon Peabody, which reduced starting salaries to $145,000 and created a new bonus program to reward top-performing associates.

The cuts announced at Chadbourne, Nixon, and other firms, while of interest to the heads of New York firms, don't matter as much as if a Cravath or a Sullivan & Cromwell were to announce pay cuts. If that happens, others in the city could follow. "We certainly wouldn't be an outlier and stay at $160,000," says one firm chief.

Salary reductions under this scenario would likely mirror how firms citywide reduced bonus value six months ago. Cravath led the market in November by cutting year-end bonuses in half, from $35,000 for a first-year in 2007 to $17,500, and eliminating supplemental bonuses that started at $10,000 for a second-year associate. Simpson Thacher and Davis Polk soon followed. Others matched those bonus  amounts.

In part, because New York firms already cut compensation by reducing bonuses, experts say firms may feel less need to cut pay again. New York firms also might be reluctant to take the reputational hit that comes from cutting salaries.

So the looming question now is whether, given the risk that no other market leaders will follow, any of the top-line New York firms will make a move. "I think the real quandary is that they all figure that somebody won't do it if they do it," says the leader of one New York law firm he describes as a market follower. "It's entirely possible no one does anything."

Experts are expressing skepticism over whether New York firms will cut salaries. "New York firms are going to do it last, if they ever do it," consultant Peter Zeughauser, who has been advising firms to roll back salaries, told The Recorder, an Am Law Daily sibling publication.

Brad Hildebrandt of Hildebrandt International is likewise doubtful. "I think what some of the New York firms believe is that with the position they hold in the marketplace, it would be counterproductive for them to cut compensation," he says.

Indeed, a few law firm chiefs at firms not typically deemed market leaders on setting compensation levels say that while a salary cut could hit the city, they aren't at the moment thinking about it. "It's certainly possible if three or four of the New York firms did something with salaries that others would follow along," says Milbank chairman Mel Immergut. "But it's not something that we are actively considering at this moment."

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