It has been amply reported that last month New York, and then all major national, firms went to $145,000/year first-year associate salaries, and that the following "Simpson Thacher bump" raised the ante to $160,000/year.   Several people have asked me whether I thought major California-roots firms (Latham, Gibson Dunn, Morrison & Foerster, O’Melveny, Orrick—the usual suspects) would match the +$15K bump not only in their New York offices (where they have, for all practical purposes, no choice) but in their California offices as well.  My reply, delivered with steadfast confidence if admittedly less internal certitude, has been that I both  hoped and predicted that they would not match the bump on the West Coast.

Why?  Because New York is, as we all know, a sui generis market.  Revenues are higher, costs are higher, the supply/demand marketplace for everything from messenger services to senior private equity partners is deeper, richer, and dearer.  California-rooted firms would be entirely rational in walling-off the "bump" at the border of Manhattan, but if they reproduce it in California, there is no obvious next stopping point. The exhausted advocate’s best friend:  The slippery slope.

Whether with prescience or with luck, my prediction that the California firms would hold the line now seems borne out

So much for the historical exercise.

Now, a more interesting question:  Why on earth is a first-year associate (and don’t forget to flow the increase through years 2 through 8 or 9, in some roughly linear scale) worth $160,000?  Why not last year’s $125,000 or some (inevitable) future year’s $225,000?

Many perspectives can be applied to answer that question, but pricing (and all we’re doing here is setting a price, even though it be on human heads) is one of the blacker arts.

Some considerations surely include:

  • An element of recognition of the investment these anointed first-years have made:
    • Ivy League-league colleges
    • Name-brand law schools
    • Superior performance even in that exalted realm
    • An investment of an extra three years of their lives and perhaps daunting student loans
  • Needless to say, what the competitors are offering
  • What those gifted youngsters could do and earn outside the AmLaw
    • Investment banking
    • Private equity
    • Hedge funds
    • McKinsey et al.
  • What the firms feel they can "afford" to pay (meaning, essentially, how much short-term pain is an acceptable tradeoff for how much long-term perceived benefit in staying in the creme-de-la-creme race)
  • What clients will stand for (and yes, although all and sundry have trotted out the obligatory denials that the increased salary costs will translate into billing increases, the pig will, as it always does, work its way through the snake)
  • And lastly, the sheer unpredictable dynamics of when the "tipping point" arrives and one finds oneself, unbidden, blinking.

Also at various times—increasingly until the dam broke in January, and, inexplicably, not once since—I’ve been asked whether I thought associate salaries were "due" for a bump given the ever-increasing PPP numbers, or the steady background drumbeat of the cost of living, or what the investment banks were doing, or what ever-higher piles student loans were amounting to, or what phase the moon was in. 

The short answer is that all those things (OK, not the moon) go into the mix in the long run. But making bets on them in the short run is a fool’s errand.

My friend Prof. Bill Henderson of Indiana Law School/Bloomington is anything but a fool, and he’s just come out with a novel and fascinating explanation of how first-years’ salary levels at firms with over 500 lawyers compare to average PPP at the AmLaw 100.  Here are the numbers:

  • At $160,000, first-year salaries are actually at the lowest relative to PPP in the last 10 years: Just 11.7%
  • Ten years ago in 1996, with first years at $70,000, the proportion was 14.3%
  • And it reached its high during that decade, of 15.4%, in 2001.

The National Law Journal has the full story.

Before we ask what this means, a methodological note: One former AmLaw 50 Managing Partner has already emailed me pointing out the obvious: This compares first-year associate salaries at firms with more than 500 lawyers with PPP at the AmLaw 100. The most recent (2005) AmLaw 100 shows 63 firms with at least 500 lawyers, so the NLJ is obviously comparing, to some nontrivial degree, two different sets of firms.

Now: Why would these figures be so?  Bill’s hypothesis is that associate pay as a proportion of (equity!) partner profits is at a near-term low not because associates are being short-changed but because the premium placed on revenue-generating, book-of-business-toting, major partners has never been higher.

And he has the statistics to prove it. 

From 1995 to 2005, the change in various classes of lawyers—to the extent changes in the population of firms permitted (essentially, firms which appeared on the NLJ 250 both in 1995 and 2005, a total of 192—looks like this:

  • Total number of lawyers:  +77.2%  [56,239 to 99,652]
  • Total number of partners:  +64.2%
  • Equity partners:  +31.7% [less than half the increase in "total lawyers"]
  • Non-equity partners: +234.1% [from about 2,600 to over 8,500: increasing the ratio of non-equity to equity partners from 1:11 to 1:3]
  • Associates:  +78.0% [statistically indistinguishable from the change on "total lawyers"]
  • All other attorneys:  +159.9% [a very small actual number, and largely unimportant]

The astonishing increase in the ranks of non-equity partners is, I would submit, the real story.  The National Law Journal buried the lead.

Bill rephrases "the lead" as follows:  "But perhaps the major implication of the new large law firm model is that the next generation of corporate lawyers…are largely going to begin and end their careers as employees."

If you care to engage in linear extrapolations—an exercise that always brings to mind the esteemed economist Herbert Stein‘s famous crack that "unsustainable trends tend to come to an end"—I’d take it a step further. 

Associate attrition is clearly as bad or worse than ever.  (Blame the "Millennial" generation for not being as driven as we Boomers if you like, but blame is not a strategy for dealing with it creatively.) Decreasing numbers even aspire to partnership; the reward is seen as the famous "pie-eating contest in which the reward is more pie," and alternative careers are increasingly available.

If you couple that with the possibility (remote, I admit, but the possibility) of Clementi-style reforms here in the US, then we may find ourselves in the next decade or so re-examining the fundamental charter of what it means to be a law firm.

Of course, some may choose not to view that with alarm—contrary to the philosophy of cable news and talk radio, where viewing with alarm is the coin of the realm. After all, what does it really mean to "begin and end [your] career as an employee?" It means you work in corporate America. And last time I checked we were quite capable of maintaining our global economic competitiveness. (Don’t tell me you’d really rather work in Tokyo, or Brussels.)  

But however this plays out—and it will almost certainly play out very differently for different firms—I’ll be here, observing and commenting and participating in the fascinating evolution of our profession industry.

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