Silicon Valley Sparks Pay War Among Law Firms

Howard Holderness, a 34-year-old San Francisco lawyer who once made $72 a month teaching English in Kenya, learned last week that he could earn as much as $245,000 this year in salary and bonus, a $36% increase in pay.

“I didn’t complain,” said Holderness, chuckling. “I was very happy.”

Holderness, a seven-year associate, isn’t the only gleeful one. Some of his future colleagues among the 70 law students that interned over the summer with San Francisco-based Brobeck, Phleger & Harrison learned that their expected first-year earnings will be bumped from about $100,000, to $155,000--even though they have yet to graduate from law school or pass the bar exam.

Holderness and other lawyers at Brobeck are beneficiaries of a Silicon Valley-spawned salary war that is sweeping the upper echelon of law firms. Whereas many workers in the booming U.S. economy have seen their salaries remain stagnant or grow only slightly in the last year, associate lawyers at some of the nation’s leading firms are seeing their earnings soar by as much as 55% a year in some cases.

The increases come as law firms, mainly those retained by Internet and other technology firms, compete for graduates of the top law schools and try to prevent their current staff members’ leaving for sweeter deals at technology firms.

“Law firms have decided to bite the bullet and pay the top price,” said Paula A. Patton, director of the National Assn. for Law Placement in Washington. “The salaries are going up and up. The big question is: Where will it end?”

This week, Orrick, Herrington & Sutcliffe, a 550-lawyer firm based in San Francisco, set a new high for first-year earnings when it announced that its first-year associates, who earned about $100,000 previously, could earn as much as $160,000 this year. Attorneys with seven years’ tenure could earn up to $270,000.

“It’s supply and demand at work,” said Ralph Baxter Jr., the firm’s chairman. “We want to make it clear that this is the place to work.”

Gunderson Detmer, a small Menlo Park law firm, sparked the salary war last December when it raised first-year compensation to $125,000 plus a minimum bonus of $20,000. Brobeck, Orrick and other law firms in Silicon Valley responded by matching or topping that rate.

Since then, a few firms in New York and Washington have followed suit. One New York-based law firm, Shearman & Sterling, gave raises, but only to associates in its Silicon Valley offices.

The major Los Angeles-based law firms have yet to respond to the wage increases, however. Ron Beard, chairman of the 700-lawyer Gibson Dunn & Crutcher firm, said it is studying the recent salary increases. “We’re trying to get as much information as we can,” Beard said. “Whatever we do will be retroactive to the first of the year.”

The recent salary increases also are notable because they were initiated by Silicon Valley law firms, not the blue-chip East Coast practices that have traditionally set the rates for associate pay.

“This is a very significant sea change in the compensation for legal services,” said Kenneth N. Klee, an acting professor at UCLA Law School.

Silicon Valley’s lead in raising lawyers’ salaries demonstrates how the Internet economy is affecting the law firms that have been crafting the spate of business deals involving financing, software licensing and mergers and acquisition for technology-related companies. Many law firms say they have been forced to turn away tens of millions of dollars in business because they did not have enough lawyers to do the work.

Some firms have seen numerous top partners and associates leave for jobs--and stock options--with the firms’ own clients.

“Our clients are a blessing and a curse,” said Tower Snow, chairman of Brobeck, which last year took in $314 million in revenue, up from $250 million the previous year. “While they are the most exciting, vibrant companies in the world, they’re magnets for our lawyers.”

Snow said raising salaries may end up saving the firm some money in the long run. “Every lawyer that leaves this firm represents a $200,000 loss in recruiting, training and relocation costs,” Snow said.

Firms such as Brobeck are competing for the top 5% of graduates from elite law schools. Increasingly, these firms are seeking lawyers with multiple degrees, including MBAs and PhDs in engineering or other sciences.

“We want people who understand technology and can move at the Internet speed of our clients,” said Snow, whose firm’s client list includes tech giants such as Cisco Systems, Intel, Compaq, Broadcom and Sun Microsystems.

Of course, a hefty compensation package is no guarantee that the new lawyer will stay for a lengthy period. To earn bonuses, ranging from $5,000 to $20,000, some attorneys will be required to bill up to 2,400 hours. For these young lawyers, that means laboring long days, nights and even some weekends.

Patton, of the law placement association, and Klee, the UCLA law professor, warned that some firms may be bulking up with too many lawyers, noting that in the early 1990s when the last legal boom ended, firms were forced to lay off hundreds of attorneys.

“I don’t think the same thing is going to happen any time soon,” Klee said. “But nothing lasts forever.”