Is there anything remaining to be said about the Great Associate Salary Spike of 2007, to a starting salary of $160,000 at New York offices of big deal firms? (You might be excused for thinking there’s not, if you were to follow every link in this round-up.) Even I addressed the great spike of 2006, from $125,000 to $145,000, at least as to some of its dimensions, last April.
At that time, I asked all of you what you thought about the salary spike, and over 400 of you were kind enough to weigh in:
Since that comes out in mice-type, here’s a recap of your answers:
- Yes; the only rational response to competitive forces: 35%
- Yes; required to attract top-tier students:: 22%
- No; it strikes me as collective insanity: 17%
- Yes; required to extract hard work: 12%
- Who knows? We can’t control it anyway: 10%
- No; and a 50% cut is overdue: 4%
Here are a few more data points:
- Although firms tend to guard this information, making it difficult to quantify the impact on profitability, we do know that the raise from $145,000 to $160,000 will cost Simpson Thacher $8-million. Since Simpson has about 520 associates, that’s $15,385 per head, implying the $15,000 spike for first-years is distributed up the food chain more or less linearly.
- Since Simpson has a little over 150 partners, the average hit to each, at least as a first approximation, will be about $50,000.
- If the effective blended billing rate of associates were $300/hour (across all classes), an additional 50 hours/year/associate would cover the direct costs of the pay raise.
- "Above the Law" covers this topic exhaustively, if not exhaustingly, here, with among other things as many internal firm memos as it’s been able to scare up detailing the rise at each firm.
Now for some thoughts and analysis on this.
At a simplistic level, it could be thought of as an exercise in supply and demand. From 1996 to 2006, the number of associates at NLJ 250 firms grew by 76%, while the number of law school graduates increased just 7% (and elite law school graduates even less): We should not be shocked if the price of a relatively-more-scarce commodity has risen. In my view, however, while a germane piece of information, not to mention something intrinsically interesting, that’s far too simplistic to take us very far towards actual enlightened understanding of this phenomenon.
Other people (not me) espouse what I refer to as "cost plus" reasoning. This school of thought, advanced primarily by the associates themselves, holds that because every major expense associates bear—exorbitant center-city rents, six-figure law school loans, living the young professional’s aspirational lifestyle in general—have advanced at supra-inflationary rates, "it’s about time" for salaries to catch up.
Nice try, but it bears only the remotest connection to the way labor markets actually function. If they functioned the way the cost-plus crowd hypothesizes, I could afford my own Gulfstream V, Provence villa, and 5-bedroom penthouse with Central Park views: After all, I just increased my "costs," so the workings of the market would appropriately subsidize me on the wage side, right?
Grasping for an explanation, let’s at least listen to what Pete Ruegger (Simpson’s chair) had to say about vaulting to the $160,000 hash-mark: It was
- Good PR: "The perception that we’re paying attention to compensation for associates will hopefully earn us goodwill,"
- Getting a leg up in the competition for talent in law schools, and
- Aimed at retaining midlevel associates.
The PR angle is probably indisputable, but query what $8-million/year, effectively in perpetuity, could buy in plain old retail-rate PR? And how quickly will the spike itself be forgotten, much less Simpson’s not-universally-admired role in kicking it off?
"Getting a leg up" lasted about a nanosecond, as every name-brand firm matched within days if not hours. And again, query whether a key selection criterion should be to prefer the folks who most eagerly follow the money?
Finally, #3, the midlevel attrition issue, begins to make more sense.
Here is where, indeed, I would like to focus the remainder of this piece.
Last weekend I was fortunate enough to be attending an AmLaw 100 firm’s annual practice group leaders’ retreat, and the topic of a partner/associate generational, or attitudinal, gap came up. (Trust me, this issue is anything but specific to any particular firm; it’s ubiquitous across our profession and, for that matter, across corporate land, wherever 20- and 30-somethings and 40- and 50-somethings work under the same roof in a mildly pressurized atmosphere.)
From both sides, the attitude of the other is perceived to be highly unattractive:
- Partners think (and I paraphrase, here as below): "Associates make so much ____’ing money, and they think new matters just fall out of the sky. You ask them to work over the weekend and they say they have plans. I never ‘had plans’ when I was in their position. Who do they think they are?"
- Associates: "Partners make so much ______’ing money, and they want us to do all the work, particularly the scut-work. I never see clients, I never go to court, I never get any real experience, the work is mind-numbing, and they keep tacking on another 50 hours to their ‘expectations’ almost every year. Besides, everyone knows institutional loyalty died a long time ago; if I don’t manage my own career, and try to have some semblance of a life on the side, the firm sure isn’t going to do it for me."
I exaggerate slightly, but only slightly, for effect, and of course I generalize. However, the problem with generalizations is precisely that they’re usually not too helpful as a guide to action.
So what I’d like to do is suggest that we break associates out into junior, mid-level, and senior, corresponding to years 1 through 3, 4 through 6, and 7 and above.
For junior associates, the spike has the greatest impact, and appeal. It’s statistically a truism that they gain the greatest percentage boost by an added $15K in compensation, and the additional money puts yet more yardage between starting out in BigLaw as opposed to pro bono, government, or SmallLaw. In other words, it probably has the greatest impact on behavior among the junior associates.
For mid-level associates, the $15K may constitute a "rough justice" approximation of the value of their contribution, and how it has increased in monetary terms with the rise in rates and billable hours over the past few years. While it’s scarcely enough to make anyone in their right mind switch firms (unless there are other serious issues), it may be fair to say the mid-levels have more or less earned it.
For senior associates, there should be far greater variability in individual compensation packages, certainly once year-end bonuses are taken into account. Therefore the additional $15K of nominal salary is probably least meaningful to this group: And it’s pretty much too late to even think of jumping to another firm if you’re serious-minded about partnership, so its impact on behavior will approach zero.
So what?
I side with where (I think) Aric Press is going in his monthly column in the March 2007 American Lawyer, where he posits that "A more elegant strategy would have been to bundle that money and use it to reward those whom the firms say they’d like to keep a few years longer." By that I presume he means the proven mid-levels.
Were I King, or at least had I been Pete Ruegger this past January, I hope I would have allocated Simpson Thacher’s $8-million differently:
- Little or nothing to the juniors, who are unknown quantities and who, after all, just got the $20,000 raise a year ago;
- Little or nothing in salary to the seniors, who are in the best position of any associates to be captains of their own ships, and to whom "pay for performance" is not an oxymoron. The surviving seniors should be rewarded more and more on discretionary bonus and less and less on fixed class/year salaries.
- Finally, most of the investment (80% doesn’t sound too high to me) in the mid-levels your firm really wants to keep. Like it or not, they’ve learned enough to have genuine market value outside your cherished walls, and they’ve also been around long enough to have been able to experience, at least vicariously, what it could mean to be a partner at your firm. And another thing—they’re starting to really perform for your clients.
Before I close, there are two other crazy aunts in the attic who deserve at least a perfunctory hearing.
The first is one I alluded to in saying your mid-levels "have genuine market value." Permit me to define who can pay top dollar for that value: Wall Street.
And today, by "Wall Street," I include Greenwich, Connecticut, global hedge-fund headquarters. At least anecdotally (I have called the recruiter but have not yet spoken to her), a third-year Schulte-Roth associate left for a hedge fund that will be paying him or her nearly $700,000/year. Do the words, "We can’t compete with that" come to mind?
Think hedge funds slots like that are extraordinarily rare? Your point is probably well-taken, but what about the legions entering the starting classes at Morgan Stanley, Goldman Sachs, Citigroup, UBS, etc., etc.? Marching shoulder to shoulder with Ivy League MBA’s, consider the different trajectories of two mid-levels making, say, $225,000 at your firm. The first one stays another, say, five years as an associate and makes a nice solid increment over inflation every year.
The other decamps for investment banking land and takes an initial compensation hit; but by three years out they’ve recovered it and then some, and about the time mid-level #1 is coming up for partnership at your firm, they’re coming up for a shot at vice president and soon after, managing director. If they make it (there’s no assurance mid-level #1 will make partner, either, of course), they’ll experience a jump-shift in compensation that will induce whiplash. And by 45 or 50 at the latest they’ll be ready to retire and start career #2 (or #3, depending on how you count).
$15,000/year is starting to sound less and less revolutionary all the time.
Let us now visit crazy aunt #2.
There’s a reason Simpson initiated the latest round of hostilities, and not a second-tier firm: And make no mistake, hostilities they are.
Why Simpson (or Davis Polk, or Cleary, or Cadwalader, or Latham, or insert-mega-successful firm here) and not someone lower down the food chain? Because the Simpson’s of the world can afford it.
The most recent AmLaw 100 report specifies Simpson’s revenue as $727-million. By now it’s probably closer to $800-million, so the $8-million they just tossed over the transom to the associates is 1% of their revenue, or roughly the amount they’d bring in the door by about lunchtime on January 4th of the new year.
Perhaps a better question than "why did they do it?" would be "was it a major decision for them?," and I would argue it was not. Again: The Simpson’s of the world can afford it. At Dewey Ballantine, Mort Pierce reportedly convened the executive committee to "call" Simpson’s spike "immediately;" I would infer the decision was made without everyone even having to look up from their BlackBerry’s.
But for other firms, the decision to match or lag behind may well have induced some soul-searching. And this is where the "hostilities" start to gain traction.
The new line in associate salary sand is yet another financial pressure point on many firms, and further evidence of the emerging gap between firms truly in the first rank and those slowly being left behind.
Update:
This came in the form of an email to me from an AmLaw 50 partner who requested anonymity:
I’ve been a fan of your website for awhile now. Thanks for the great work. It’s a definite ‘must read’ for any lawyer who considers him or herself an owner (or potential owner) of their law firm.
From my perspective, the greatest truth is in your last two sentences. The best explanation I believe for the first year pay raise is that the ‘bulge bracket’ capital markets firms are acting to increase the cost of competition for other firms (like an airline that cuts prices to/from a city when a new competitor enters the market). While you note that 1st yr’s compensation as a percentage of profits per partner are at a 15 year low for the AmLaw 100, if you took that compensation and compared it to the distribution within the AmLaw 100 I suspect you’d get a very different answer for the law firms along the flat part of the PPEP distribution curve. As you say, just more pressure on the gap.
It will be interesting to see how this plays out over the next few years. I wonder if law firm business models will eventually start to mirror the model of the national accounting practices (many fewer national firms where each firm internalizes a two tier structure with ‘local’ and a ‘national’ offices).
Bruce again: Is he right to imply that there’s increasing pressure on the one-size-fits-all national associate/partner model? If so, what alternative organizational structures would be optimal?
