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Wednesday, January 25, 2017

Fiscal Pressures on Law Firms Curb Compensation and Hiring


The fiscal pressures on traditional law firms show no sign of easing, as demand for legal services continues to fall and firms’ expenses rise. Findings from Armanino’s 2016 Southern California Law Firm Compensation, Billing Rates and Benefits Survey show that the ongoing financial strain is curbing attorney compensation and hiring at many local firms, while cuts to non-attorney costs may be hitting their limit.

One surprising finding is the base salary for first-year associates in Southern California, which averaged $119,000. While compensation levels can vary significantly across practice areas, this is significantly lower than the salary for new attorneys at Am Law 100 firms, which recently rose to a reported $180,000.

The salary difference likely reflects local firms’ tempered growth expectations. Almost half of the nearly 200 firms and branch offices surveyed expect little to no revenue growth over the next two years, reflecting the softening client demand for their services. Clients’ legal options have expanded, with more work being retained in-house, and as a result, average billable hours have declined by nearly 7 percent over the past four years, while billing rates remain stuck at 2012 levels.

As they increasingly do routine legal work themselves, clients are also less willing to pay for junior staff hours. Average billable hours for paralegals with less than 10 years of experience have dropped 16 percent in the past four years, while attorneys in their first four years of practice have seen their hours reduced by 4 percent. Despite the reduced billable hours and flat rates, total compensation for attorneys has gone up 5 percent over the past four years, while paralegals have seen increases of 15 percent.

At the other end of the spectrum, partners are working harder than ever to maintain their compensation levels. Their hours are up by 10 percent since 2012, but their total pay has not kept pace, growing 7 percent.

Managing partners have responded to the revenue slowdown with cost cutting, slashing non-attorney expenses by 20 percent over the past four years. The 2016 survey results indicate that the cuts may be starting to reach some limits, however, as major fixed costs of employee salaries, office rents and insurance continue to rise. The pressure to maintain profitability has also started to affect attorney hiring, as the ratio of associates to equity partners has declined by 15 percent since 2012.

About the survey
The annual Armanino Southern California Law Firm Compensation, Billing Rates and Benefits Survey is a comprehensive benchmarking report that covers nearly 200 law firms and branch offices in Los Angeles, Orange and San Diego counties. It contains information on more than 50 different positions within the firms, including partners, attorneys, paralegals, legal secretaries, administrators and more. The report details competitive compensation, billing rates, hours and staff ratios across many demographic segments, including practice areas, locations, firm sizes and positions. For more information about participating in the survey process or purchasing a copy of the report, contact Crystal Lee at crystal.lee@armaninollp.com.

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