The growing gap between the “unrealistic” pay expectations of associates and the salaries law firms are prepared to offer them is highlighted in Canadian Lawyer’s 2013 Compensation Survey. Among the survey’s 553 respondents, the average salary for a first year associate has fallen to $66,000 — a nine-per-cent drop from last year, which had already seen a five per cent year-on-year decline. At the same time, a slightly greater number of firms are setting annual billable hour targets for associates: 49 per cent of respondents, up from last year’s 44 per cent. Targets range from 650 to 1,850 annual billable hours, with an average just over 1,400.

The figures come amid much industry discussion about the need to rein in compensation packages for more junior lawyers. Asked about the areas of greatest dispute in establishing compensation rates, one respondent said: “Unrealistic new lawyers.” Another complained about “associates not billing enough,” while another put it as “paying associates higher and higher wages in return for them earning the law firm less and less.”

Does this year’s survey suggest firms, concerned about the economic slowdown, are imposing a starkly draconian regime on their associates? Not exactly. Only seven per cent of firms penalize those who fail to hit their billable hours target, though this is a slight increase on last year’s five per cent. Meanwhile nearly a third offer bonuses to associates who hit the hours target.

Forty per cent of firms have annual monetary billing targets for associates, most commonly requiring them to bill under $200,000 a year. This is less ambitious than last year’s average target of between $200,000 and $300,000. In the 2013 survey, 39 per cent of firms say they hand out bonuses for hitting the billing target but only four per cent penalize associates who miss it. Half of all firms paid bonuses to associates in 2012, worth $10,000 on average but going up to $77,500.

And newly called lawyers can still command high salaries: $105,000 was offered by one firm. However, firms with up to nine lawyers paid first year associates as little as $40,000, offering $60,000 on average. “Right now you could argue that in the current economic climate, some of the bigger firms are overpaying their associates,” says ZSA Legal Recruitment president Warren Bongard. While smaller firms, which like last year constitute the majority of survey respondents, may be reducing first-year associate salaries, Bay Street firms competing for top talent are unlikely to follow suit, Bongard believes. “They’re still looking for their next partners every time they hire someone,” he says.

Associate salaries by year of call ($)

Even so, few seem to be matching the salaries offered by top firms in the U.K. and U.S., some of which pay newly qualified lawyers $185,000. Dal Bhatal, managing partner at legal recruitment firm The Counsel Network, says the downturn means Canadian firms no longer need to worry about foreign firms luring young lawyers away. “When the economy was hot, U.S. and U.K. firms would cherry pick [Canadian] talent, even students who hadn’t even [been called yet], which created pressures.” International poaching is no longer a concern for Canadian law firms, however there is still sufficient competition within Big Law firms to keep salaries moving steadily upwards, says Bhatal. Firms are controlling costs by reducing their hire-back rates, rather than by cutting wages, she adds.

At the other end of the law firm ladder, the compensation picture for partners is mixed. Just under half of partners saw their earnings increase in 2012 compared with 2011. The biggest proportion of respondents said partners at their firm earned between $151,000 and $200,000 including salary, annual draws, and splits but not bonuses or perks. But at 41 firms, partners earned over $600,000.

Partner income ($)

Around half of firms paid non-equity partners a salary, while the rest paid a share of profits. Equity partners were most likely to be compensated on an eat-what-you-kill basis, though nearly a quarter were paid on an equal partnership basis and eight per cent on a 50/50 subjective/objective basis. Three quarters of respondents had no billable hour target for partners.

Equity partner compensation methods

Two-thirds of firms offer benefits, comprising 12 per cent of compensation on average. Three-fifths offer perks such as professional development and health club memberships, making up five per cent of compensation on average. Only eight per cent of respondents, however, provide a pension plan.

Two-fifths of firms plan to hire more lawyers and 57 per cent will freeze numbers. Only two per cent say they will downsize.

In-house counsel

Corporate legal department budgets are consistent with last year’s, with a third of respondents planning to spend less than $500,000, 23 per cent between $500,000 and $1 million, 19 per cent between $1 million and $2 million and 14 per cent between $2 million and $5 million.

Salaries for newly called lawyers have risen overall [to $80,000] from $77,500. The median salary for general counsel at director level is $155,000, rising to $195,000 for those at executive level.

Bongard says companies’ desire to attract top lawyers who may be thinking of leaving their law firm is driving up in-house salaries but not necessarily to the point where they match the most generous law firm packages. Many corporate law departments are offering lawyers short- and long-term incentives such as equity and stock shares to create “golden handcuffs,” he adds. Increased supply could also push salaries back down, he believes. “There’s definitely the prospect that [corporate legal departments] won’t have to pay as much to get people [to move in-house].”

Bhatal agrees. “In-house is now the preferred environment. There’s a huge pool of candidates.” However, she highlights the marked regional variations, with Ontario traditionally offering the highest compensation levels and British Columbia the lowest, although Calgary’s average pay packages are starting to overtake Toronto’s, thanks to the oil and gas sector.

Overall, 72 per cent of in-house respondents said salaries were likely to rise in 2014, though this varied by sector. Less than half of respondents from government departments expected to see pay raises but nearly all those in the financial services industry and service sector predicted pay would increase. Some government bodies are circumventing mandated pay freezes by enhancing benefits packages, Bongard says.

The survey shows two-thirds of law departments paid bonuses to lawyers in 2012, ranging from $3,500 to $135,000.

In-house salaries by year of call ($)

All the corporate legal departments taking part in the survey said they offered benefits packages, which made up 16 per cent of compensation on average. Four-fifths offered perks like health club membership and three-quarters had a company pension plan.

Click here to see the results of the 2013 Compensation Survey.