Balancing the Scales: Strategies for Addressing Pay Compression in Law Firms

By Chere B. Estrin

I had lunch last week with a friend who is the Director of Administration at a top, major law firm. The firm had been seeking a litigation paralegal for months. When I first received their search, the hiring requirements included 5-10 years of litigation paralegal experience, actual trial experience, ability to handle legal research, drafting and a whole host of other higher-level assignments.  The salary was $80-$127,000 plus bonus (a huge range) and great benefits. Additionally, this is a firm with low turnover and just a nice place to work.

I received a call from her about a week later. “We’ve changed the search,” she said.” The hiring manager wants to find a 2-5 year litigation paralegal who has gone to trial and does not want to pay more than $65-80,000 per year. Must have gone to trial.” Quite a twist! Part of the problem was there were plenty of senior level paralegals at the firm, so they wanted to bring in a lower level because the firm did not want new employees to make a salary more, close to equal or equal to current employees. 

OK. Got it. Now, the hiring requirements to get into this AmLaw firm are strict plus the candidate needs to hail from a like firm. For those of you who have not had to hire too much in the last couple of years, let me clue you in. The unemployment rate at this writing is 3.7% across the country, the lowest in 30 years. Anytime the unemployment rate goes below 4%, there is a candidate tight market or a shortage of candidates. At this writing, the unemployment rate in the legal field is below 1% or, specifically, .06%. No number of Indeed ads are going to shake lose candidates unless you are offering the sun, the moon and partnership, Basically, most firms are posting and praying.

Part of the problem is salary compression. Definition: when the pay of one or more employees is very close to the pay of more experienced employees in the same job or when employees in lower-level jobs are paid almost as much as their colleagues in higher-level jobs, such as with managers and direct reports. Pay inversion is when newer or less experienced employees make more than more knowledgeable or more experienced employees currently in place.

Let’s look at the paralegal market in Los Angeles. Starting salaries today are anywhere from $60,000 – $67,000 right out of the gate. The starting salary a few years ago was around $50,000. Given a standard 3% increase for that entry level paralegal to reach five years of employment at the same firm, their salary today would now be $59,653 or equal to the entry level paralegal at $60,000+. 

Now, let’s bring in a five-year paralegal (in Los Angeles) whose salary (at a comparable firm) should be anywhere from a low of $90,000 to at least $100,000. The difference of current market vs. an employee in the same position at the same firm for five years, is enough to make anyone beat feet for the door. Fast. 

For those of you who say, “That’s ridiculous. I would never allow a five-year paralegal at our firm to be paid $60,000”. Ok. I buy that. However, exactly what salary adjustments did you make? $10,000? $20,000? $25,000? Let’s say you went the full bola: $25,000. That would still bring that paralegal up to $85,000 or at the bottom of the market rate. Are you serious? For a top 10 firm whose attorneys hail from Harvard, Yale, Standford, with Fortune 1000 clients needing to attract top talent?

What happened? As you can see, the dish ran away with the spoon. Now, you are dealing with employees making a salary at the bottom rung of the ladder during the most transparent market ever. Your first red flag is that turnover is about to occur. 

During the pandemic, candidates were so tough to get, many firms were paying signing or hiring bonuses. We saw those bonuses for paralegals and occasionally legal assistants go anywhere from $3,000 to $20,000 depending upon specialty or years of experience. Those days are long gone. Yet, the higher salaries remain. For those firms who managed to get through the pandemic with little turnover, you are probably now in a pickle, just like my friend’s firm.

Let’s go back to the hiring requirements of that firm including “must have been to trial”. Unless you were in a locked down courtroom with judges, bailiffs, attorneys, and clients in hazmat suits, you didn’t go to trial. No one did. Who the heck was going to chance COVID, particularly before the vaccine? Not anyone I knew. Where am I going with this? The 2-5 paralegal with trial experience right now barely exists. Unfortunately, employers are now looking at resumes wondering why some candidates hopped around from 2020 to 2023. Can you spell C-O-V-I-D? And for the skill gap, let’s spell P-A-N-D-E-M-I-C.

So, here we are. That ole pickle: the current staff underpaid, a need for experienced people and a fear of hiring someone at the present market rate who will be paid more than current employees. Wow. 

According to a white paper by PayScale, “How to manage pay compression with agile compensation”, employees are reevaluating their compensation options, and placing pressure on organizations to respond accordingly. This pressure is particularly pronounced when employees perceive disparities in pay compared to their peers in similar roles. Pay compression, also known as wage or salary compression, often occurs inadvertently or gradually over time, rather than as a deliberate strategy by firms.

This phenomenon is exacerbated when market conditions rapidly change [as they did during the pandemic]. It necessitates higher salary offers to attract new talent, while current employees see comparatively limited salary increases. Pay compression is not a novel occurrence but has become increasingly prevalent. In more challenging situations, it can escalate into pay inversion, where newer or less experienced employees earn more than their tenured counterparts, potentially including managers”.

What causes salary compression? 

This situation occurs when firms increase starting salaries to attract new hires without making appropriate adjustments to the pay of existing employees. This reduces the gap in pay between a new hire and a tenured employee. Salary compression can be attributed to: 

• Market forces
• Inconsistent pay practices over time
• Unintentional biases
• High demand for specific skills
• Inability to raise salaries of current employees
• Lack of growth.

Not addressing salary compression can have serious consequences for your firm. When employees feel they are not being compensated fairly, it can lead to:

• Decreased morale and less employee engagement
• Lack of loyalty
• Search for more growth and upward movement
• Job dissatisfaction
• Increased turnover
• Bad PR and firm reviews
• Inability to attract the best candidates
• Legal ramifications.

1. Demand exceeds supply: In this tight candidate market, 2-5 year associates, paralegals and legal assistants are in short, short supply. These skills are often rewarded with more pay for changing employers than remaining loyal to their current firm. In other words, pay compression happens when firms increase salary to attract new hires and don’t give market adjustments for current employees.
   
2. Internal pay ranges are out of alignment with external market data. This usually results from insufficient, old data or just plain guessing. At this point, your hiring manager may start making “higher than targeted” offers to get candidates who, along with staffing agencies, are telling them what the current salaries are. Hiring too many new employees at these higher salaries compresses pay for all your tenured employees. If they perceive they are underpaid compared to other employees in the same or similar positions, they most certainly start searching for a new job.
   
3. No structured or too-broad pay grades plus no upward movement available. You have a muddled compensation structure, such as broad pay grades or jobs that don’t apply tiers to positions where employees can grow into more senior or experienced roles. For example, in many firms (ok, most), a paralegal is a paralegal is a paralegal. There are no designated tiers i.e., entry, mid-level, senior, trial paralegal, specialist, etc., only one job range for all of them, causing pay compression to develop. You are most likely creating a sense of career stagnation which can lead employees to look outside your firm for advancement. Be aware, staff in law firms are above average in intelligence. Take a person above average, give them no growth, lower pay than the competition, stagnation or routine and repetitious tasks and not only do they become bored or burnout, they leave, generally citing “more growth opportunities”.
   
   If you create unique pay ranges for each level of proficiency within the job and promote employees to the next tier when they achieve a new level of expertise and responsibility, you will have better employee engagement, loyalty and less turnover. A tiered paralegal or legal assistant program works wonders.
   
4. Rapid inflation: In 2022, inflation climbed to the highest in 40 years and creating hardships for your lowest paid employees. When inflation increases, so do expenses. Some employees who make barely enough will consider other options and find a higher paying job. Giving pay increases when inflation spikes is risky. The situation can be temporary, making a permanent pay hike unnecessary. There are some solutions. Beyond market adjustment for the going salaries, look at variable pay to offset inflation. Some firms provide stipends for food, utilities, or gas that is separate from base pay and only in effect for as long as inflation remains high. The right solution depends on where your staff is the most stressed and what budgets allow.

• Job descriptions: Job descriptions may be an issue as they can be unclear, outdated, ignored or even non-existent. If a new hire is earning as much or more than an experienced employee, is it really the same position, or are these two different roles?
  
• Hourly workers may be making more than salaried contributors, and even more than their managers. Hiring more new hourly workers to cut down on required overtime or converting hourly workers to salaried positions (if it is legal according to the Labor Board) may be a solution. If it’s not feasible to increase the pay for current workers affected by wage compression, consider rewarding them with a title change or career-development coaching, providing additional paid time off, professional development, larger bonuses, better benefits. Be sure to address the pay compression at some point, however. Giving an employee a better title is a sure short-term morale booster but remember, if they are not getting paid according to market, the title is a nice thing to take with them when they leave.

Solving the problem
In the newsletter, Advisor, consultant David Wudyka clarified the issues around pay compression. His steps for curing it, plus a webinar: How to Find and Fix the Pay Errors You Don’t Even Know You’re Making, offers some very good solutions. 

1. Revisit/rebuild “grade structure.” Rebuild your grade structure, which may be responsible for “structural compression.” More often than not”, says Wudyka, “a major contributor to existence of pay compression rests with the nature of the pay ranges themselves, specifically, that they are too narrow from grade to grade”.
2. Make “equity adjustments” to accelerate pay. When you look at a group of employees at the low or high end of the range, identify employees whose performance level and rate are not in the proper relationship. Those are the candidates for salary adjustments.
3. Make sure your ranges are tied to the market. Adjust pay ranges on a regular basis such as every year. If you can’t do that, it’s probable that you are falling behind the market.
4. Consider promoting employees. When concerned about those clustered at the top of the range, ask, “Is this a person that we can move out and up to another pay grade? “Don’t do this lightly”, says Wudyka, “but if someone could contribute to a job with higher responsibility, you can solve the pay compression problem”.
5. Consider “re-assessing” some employees. If you have underperformers, consider freezing compensation. Generally, you don’t want to take pay away, but you can freeze. Or ask, should this person be reassigned to a job with lower responsibility levels?
6. Rewrite job descriptions. Reclassify employees as duties change. Have a person’s duties, roles, responsibilities changed? Is a person’s role too narrow?
7. Consider merit bonuses instead of raises. Most law firms pay bonuses. “This is not a solution per se, but you can use bonuses to avoid aggravating the pay relationships in compression situations”, Wudyka says. “The obvious benefit is that you can allow some rates to float up, and others to remain the same to “disperse” the bunched pay rates, all without building increases into base pay rates”. (You may consider raising bonuses.) You may also consider a formulated bonus vs. a merit bonus such as awarding a formulated bonus based on billable hours. You can also structure bonuses to be paid on a quarterly basis instead of once a year.

Resolving pay compression

The obvious answer is to pay employees what they are worth by resolving pay compression and enacting merit and market increases — or at least for your most significant and profitable roles. This would require allocating budget for pay increases everywhere pay compression exists. If your response is “But we can’t afford that!” at least consider the thousands of dollars in what you would have to pay to replace underpaid employees who leave. Consider the additional expense incurred in the recruiting process, staffing fees, dip in morale, loss of revenue and productivity while positions remain unfulfilled.

For example, in my friend’s firm, the firm refused to pay more than $80,000, under market for the hiring criteria. You may get away with paying the two-year paralegal $80,000 but not $65,000. Let’s say they even brought up the salary to $87,000. That’s $7,000 more per year. Given paralegals bill out at around $200 per hour or more, and the position remains unfilled for months while they dig their heels in the mud, the refusal can create as much as a $30,000 per month loss in revenue. If the position remains open six months (which it probably will), the firm loses $180,000 in revenue, all for refusing an extra $7,000. (There’s always raising hourly rates, but that’s another story for another day.)

According to the PayScale white paper: “When it comes to raises, don’t default to annual base pay increases of three percent or so applied indiscriminately across the entire workforce. You need to look at what your key positions are worth on the market, how minimum wage or inflation has impacted certain locations, whether there is inequity in how employees are paid in the same job, whether there have been changes in employees’ job descriptions, and how individuals have performed in their roles. Compensation should be adjusted accordingly or as much as you can justify given your budget.

Addressing pay compression isn’t just about base pay. It’s also about total rewards, including variable pay and benefits. In lieu of base pay increases, bonuses can be an effective tool to reward high performing talent and retain employees. Look into stock equity and other forms of rewards, including trading time for money such as additional or unlimited PTO, preferred scheduling, and other perks. It’s really about the whole employee experience, of which a mature and proactive approach to compensation is an important piece, but not the only one.”

Annual adjustments are often enough, but your recruiting team or staffing organization can give you early feedback on positions that are moving more quickly in the marketplace. Don’t overlook the value of staffing organizations. They have their hands deeply entrenched into the market and know precisely what other firms are paying. An often-overlooked resource, staffing organizations can be your best friend.

It’s a different situation when employees with less experience are making more than more tenured staff if the gap is offset by something such as location or performance. Take a proactive approach to compensation so that it doesn’t get out of hand. You don’t want your pay practices to drive your best employees to seek new jobs to obtain what new hires with less experience are making. This involves more frequent monitoring of pay equity both internally and externally.

It really doesn’t matter if your pay compression is out-of-hand, it is most likely less expensive to address the situation up front than to continue to lose the firm’s best hires over something that is within your control — along with the right thing to do. Be aware addressing pay differences that might result in legal trouble, such as a gender, age, or racial pay gap, even in a down economy. Always check with your labor counsel.

In the end, firms taking a proactive approach to pay compression, especially in this age of pay transparency and open communications, are more likely to be firms where the best talent wants to work. It’s a very transparent world now. With the strangulation of good candidates, you can’t afford to lose out on the best hires. / Competitive pay throughout the firm is a huge selling point resulting in attracting the strongest candidates and having the most engaged, loyal, long-term and productive employees. Remember that old adage, “Do the right thing”.

About the Author

Chere Estrin has over 20 years of experience in the staffing arena, including executive positions in law firms, litigation support companies, and the legal staffing divisions of a $5billion publicly held corporation. She is CEO of Estrin Legal Staffing, a nationwide staffing organization. Ms. Estrin was founder of the Paralegal Knowledge Institute, an online CLE organization. She publishes the prestigious digital magazine, KNOW, the Magazine for Paralegals, and is the former Editor-in-Chief of Sue, the Magazine for Women Litigators. She is also the author of 10 books about legal careers for attorneys and legal professionals.

Ms. Estrin’s contributions to the legal industry have been significant, and she continues to play an active role in shaping the future of legal staffing and training. She writes the popular,

award-winning blog, The Estrin Report, and has been interviewed by CBS News along with many top publications, such as The Wall Street Journal, Fortune Magazine, Forbes.com, Los Angeles Times, Entrepreneur Magazine, Newsweek, The Chicago Tribune, The Daily Journal, ABA Journal, Above the Law, ALM, Law360 and many others. She has also been a speaker for many prestigious organizations and written hundreds of articles.

As the Co-Founding Member and President of the Organization of Legal Professionals (OLP), Ms. Estrin has guided the association’s development and implementation of the eDiscovery and Litigation Support certification exams (first in the country) along with Pearson Publications, a $7 billion corporation specializing in certification exams and educational publishing. She was also the Education Director designing, creating and executing online, live training programs with an on-call roster of over 500 instructors throughout the world. Currently, she provides webinars on legal career matters for LawPractice and Lawline, two of the largest attorney CLE online training organizations.
Ms. Estrin is a co-founding member of the International Practice Management Association (IPMA) and the Organization of Legal Professionals, composed of a prestigious Board of Governors inclusive of judges, an ABA President, and well-known attorneys. She is the recipient of the Los Angeles/Century City “Women of Achievement” award and recognized as One of the Top 50 Women in Los Angeles. Ms. Estrin has been writing The Estrin Report since 2005 and most recently launched her podcast, “Lawfully Employed”.

Reach out at: chere@estrinlegalstaffing.com or visit her website at www.EstrinLegalStaffing.com.