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Associates at Latham & Watkins were celebrating last week after the US firm confirmed it would be reversing the salary freeze it introduced in December 2008.
As reported on The Lawyer.com (5 January), Latham is one of the first firms to unfreeze salaries. The move comes a year after the firm laid off 440 lawyers and staff.
But although the move will have been welcomed by the US firm’s associates, the word in New York is that the pay rise is less of a signal that market conditions are improving and more a necessary step to stem a rising tide of junior lawyer exits.
“Latham are doing it because they’re desperate,” said one Manhattan recruitment consultant. “They’ve lost a whole bunch of good associates and, to the extent that there are jobs out there, Latham people are looking. Latham figure it’s the best way to show good faith with their associates, but it’s too little too late. They’re no longer drinking the Kool Aid.”
This is not exactly the spin that Latham will have been hoping for. The news was widely interpreted as hailing a return to form for the firm, which struggled last year against a falloff in deal volume.
The result was not only the job cuts, but a 4 per cent drop in revenue to $1.92bn (£1.2bn) and a 21 per cent drop in average profit, from $2.27m to $1.8m.
Now that Latham has put its associates back on compensation parity with the elite US firms it is expected that the firm will announce 2009 financial results that are at worst flat and at best an improvement on 2008’s - something that 12 months ago appeared extremely unlikely.
“I think we’ll be up,” said one New York-based Latham partner. “The year’s ended up as being one of the strongest ever in terms of high-yield, there’s a healthy level of capital markets deals, and while private equity was slow there were a good number of restructurings of private equity portfolio companies. People feel there’s a pretty rosy outlook for 2010.”
Another Latham partner insisted there was no ”hidden agenda” behind the salary increases. “It was never the idea to not go back to the norm when the right time arose,” added the partner. “Last year just ended up being much better than we’d originally expected.”
Latham brackets itself as being in the same peer group as the US elite firms, all of which continue to pay associates on a lockstep system.Latham’s 2009 financials are unlikely to be known for several weeks, but the firm’s decision to thaw the associate pay freeze raises other questions, not least about the long-term viability of lockstep at the firm for junior lawyers.
But in recent months firms such as Orrick, Reed Smith and WilmerHale have broken their lockstep systems and replaced them with merit-based banding remuneration systems, which place the emphasis on skills gained rather than time served.
“I think it’s a smart move by the firms that have done it,” said New York recruitment consultant Renée Berliner Rush of AW Rush & Co. “At some point every firm’s going to have to seriously consider doing it. Clients are no longer simply happy to pay $50 more on 1 January just because it’s 1 January.”
Latham clearly is not ready to take that step yet, but if it was associate pressure that eventually pushed the button on the pay rise, do not rule it out in the long term.