(Reuters) - Steptoe & Johnson has cut pay and hours for associates who aren't meeting billable hour goals in a move industry watchers say may portend future pay roll-backs across other large law firms.

A “small number” of Steptoe associates who are consistently putting in below 80% of their expected billable hours were moved this week to reduced work schedules with lower pay through the end of 2022, according to a firm spokesperson.

Associates were informed of the possibility of such a move in January, the Washington, D.C.-based firm said.

The firm did not say how many associates were affected nor did it provide further comment.

Associate salaries have been the single-largest driver of law firm expense increases since 2021 and have cut into firm profits, according to May figures from Thomson Reuters Institute's latest Law Firm Financial Index.

Associate moves from one law firm to another increased 149% in 2021, according to the National Association for Law Placement. Firms scrambled to staff up amid surging demand for their work last year, hiking salaries and bonuses in the process.

But the May Thomson Reuters report found slowing demand for transactional practices, where many law firms have hired heavily. A possible U.S. recession poses another potential risk.

At the same time as it cut back pay and hours for some associates, Steptoe increased its mid-level and senior associate pay scale to match its large law firm competitors with salaries ranging from $215,000 to $415,000, effective July 1.

“At year end, we will review again associate utilization and performance and expect to continue to reward our high performers,” Steptoe said in a statement.

Moving underutilized associates to reduced work schedules and cutting their pay could provide a "more creative" solution for firms than layoffs, said Stephanie Biderman, a partner at legal recruiting firm Major, Lindsey & Africa.

“It’s thinking outside the box a little bit and not rushing to cut someone, and trying to be more measured,” she said.

She said recent across-the-board associate pay increases at law firms did not distinguish between lawyers who are busy and those who aren’t.

Beth Cavagnolo, of law firm consultancy Vertex Advisors, said the associate salary war is prompting firms to rethink their overall approach to compensation.

“The comp wars increased budgets and put a lot of pressure on firm economics, not to mention the external client optics of the increases,” she said.

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