Some of you may have seen the piece that ran in The Recorder about 10 days ago with the attention-getting headline, "In Salary Twist, Firm Pays More–and Less." (It was also picked up by the WSJ’s Law Blog, as the "Associate Compensation Story of the Day.")
The story profiles the ingenious associate compensation policies of Duval & Stachenfeld, a 50-lawyer New York based firm. Other firms may well have tried such unorthodox policies before, but I’m unaware of any other firms of significance using them today. Here’s what they do:
- First-year’s start at $60,000 (and no, I did not inadvertently drop a leading "1") and are placed in the two-year long "opportunity associate" track;
- After nine months, they go to $80,000 and then get $10,000 raises semi-annually. No later than the end of their second year, but sometimes as early as at the end of their first year, they are promoted to the "full associate" track where the firm pays them the going market rate. (The "going market rate" is currently determined by what Cravath is paying—plus $10,000 as a sweetener.)
- Assuming mutual satisfaction all around, they stay on the full associate track for the duration, until eligibility for partnership in their 7th to 9th year, with the 8th year being the expectation.
What’s going on here?
While the Recorder‘s article lays out the basic parameters—which I found deeply intriguing, inventive, and potentially mold-breaking—when I read through the comments to the WSJ’s Law Blog piece, which are filled with what borders on vituperation (samples follow), I found myself compelled to learn more on my own, and so I contacted Bruce Stachenfeld, who was gracious enough to give me more background on the plan.
Full disclosure: Bruce and I overlapped for a few years in the 1980’s when we were both associates at the late Shea & Gould, but we had not been in touch since and, aside from some banter about what really caused the demise of that wonderful firm, that circumstance has affected the content of this piece not one syllable.
First, the promised samples of vituperative comments:
- Sounds like indentured servitude to me
- Sounds like a major bait and switch
- Partner greed masquerading as concern for clients
- Warning to associates! 90% of the firm’s associates are new grads. THEY DON’T HAVE ANY SENIOR ASSOCIATES. Based on their demographic data, they use you for a few years and fire you before giving you the raise
But we have a few supporters:
- From my perspective, there is no downside. The starting pay is more than what I’ll make at a small firm, and if I make it to the third year I get paid as much as a Cravath associate.
- I know a lot about this firm having dealt with them frequently. […]. It ends up being a win-win even for the associates that don’t “make it” – the training and reputation of the quality of this firm’s work enabled each and every one of them to get jobs in top-tier firms after getting 1-2 years experience at this firm. It actually is a system that works great for the associates, clients and partners – in almost all cases, everybody wins.
When I spoke with Bruce, I asked him where the plan came from, how it was working, how clients have reacted, and what the motivation for going off the conventional reservation was. Herewith a distillation of our conversation.
They started the plan in 2003 "as an experiment." But it "has worked out incredibly superbly." Here are the statistics:
- Class of 2003 (the first year it was in effect): Hired 5 associates; 4 were promoted and one left
- Class of 2004: Hired 9 associates; 4 were promoted and 5 left
- 2005: Hired 4; 2 were promoted and 2 left
- 2006 & 2007: Still in the program; too early to say.
- Overall, of the 9 promoted from "opportunity associate" to full associate, 8 are still at the firm and one left post-promotion.
These numbers are no worse, and arguably better than the average attrition rates across the AmLaw 100. The most widely publicized statistic on that issue (courtesy of NALP) is that 62% of starting associates are gone by the end of their fourth year. Perhaps more to the point, Bruce repeats that if you track only associates who leave after the initial two-year period, they have lost only one. He believes the firm has more mid-level and senior associates, proportionately, than the average firm. Here’s the distribution:
- 7th year: 1
- 6th year: 1
- 5th year: 1
- 4th year: 2
- 3rd year: 4
- 2nd year: 2
And out of a total of 25 associates currently at the firm, 11 have graduated to full associate and 14 are still "opportunity associates." (I asked where that phrase came from, and he said that it reflected the thinking that the program offered opportunity both to the junior associates and to the firm.)
What do clients think? "Those that know about it are extremely positive. But understand, this is not meant to be an exercise in morality, but a business tool. We don’t have to bill out junior associates at stratospheric rates to cover their costs and so clients don’t have to pay for relatively inexperienced lawyers. On the other hand, by the time lawyers are in their third to fifth years and above, they’re providing truly valuable service and that’s when clients benefit most. We chose to focus our money on associates who matter most to clients."
How do you recruit? What do you tell students? Bruce replied that they generally go to about ten law schools and "we look for people who just barely missed making the cut at Skadden. We look for the most highly qualified people we can find, but still, face facts, you never can know how good a lawyer someone is going to be until you start working with them." Bruce became animated, telling me, "Look, historically these are not second class people but incredibly good. Clients like them; they’re eager; they work hard; they give it their best shot."
And how many actually make it through to partnership? "We tell them that if they’re still here in the fifth year that partnership is theirs to lose, not theirs to win. And the proof of that is that of the ten equity partners in the firm, three rose through the associate ranks. In the past five years, not a single person who’s come up for equity partner has been passed over; prior to five years ago one associate left the firm shortly before being considered for partnership."
What else would you like to tell me? What else should people know about this model?
"We’ve actually started something new; we’re just launching it. We call it our ‘major/minor’ practice group focus. We want every associate to have a major practice group, where they’ll spend 90% of their time, but also a minor practice group, for 10% of their time. Look, law is a cyclical business, so if you’re 90% real estate and let’s say there’s a slump, maybe you can pick up on your 10% bankruptcy practice and fill the gap. It’s just an experiment, again, but so far we like the way it’s shaping up."
And finally, I ask why they embarked on this experiment to begin with.
"Our goal is simply to build one of the greatest law firms in the world. I mean it!
"Skadden is one of the greatest law firms in the world, but their business model is different than ours. Their model (as I understand it) presumes that associates will start there and work for a few years and likely move on after having received excellent training. They don’t really expect that a significant percentage of starting associates will become partners. It’s a win/win for the associates, who get to put Skadden on their resume, and Skadden, which gets to hire plenty of star associates.
"Our model is different. We hire people expecting (and hoping) that they will be qualified, and want, to stay for the long term. In order for us to succeed with this model we need to treat our people with absolute respect, integrity and total honesty. If we don’t do that then, quite simply, they will quit and the whole thing won’t work.
"We try to be scrupulously honest with everyone about their prospects, their performance and how they are doing. It just doesn’t work any other way."
Bottom line: I think they’ve hit upon an ingenious way for the firm to "test-drive" starting associates at minimal risk and without alienating clients with head-turning salaries or billing rates. To the charge that associates are being exploited I would reply on the moral plane that, in the larger scheme of a 40-year career, the "sacrifice" entailed is minimal weighed against the potential opportunity opened and, on the economic plane, that since by hypothesis Duval & Stachenfeld is drawing from the pool of law school graduates who do not have BigLaw offers, their market alternatives are limited and this may well be a creative way of providing a highly attractive option.
In short, more creative thinking like this may help show the way towards escape routes from the increasingly brittle Cravath System that we’ve been living with for decades—under sustained and increasing assault from the forces of "work/life balance," Gen Y and Millenials, women who actually might contemplate non-childless marriages, and the calls for revolt against the tyranny of the billable hour.
I’d like to bookend the Duval & Stachenfeld story with another one from Legal Times discussing the struggles of Washington, DC firms over whether to match the "Simpson Thacher bump" of first-year pay to $160K earlier this year. Its premise is that, startled as DC firms might initially have been by Simpson Thacher’s hostile initiative, they have now recovered their bearings and fallen into step at the $160K level.
More than six months on, the article supports my belief that the bump was an attempt to put increasing pressure on firms below the top-most tier (see "What does the great associate salary spike really mean?")
"New York firms have to be frustrated," says the managing partner of an international firm based in Washington. "There’s an attempt on the part of the Simpson Thachers of the world to divide the industry into first class and second class. But no one willingly accepts the characterization of being second class."
The raise had nothing to do with competition among top New York firms: This was not Simpson Thacher sticking its thumb in the eye of Davis Polk or Cravath. Rather, it was an attempt to draw a line in the sand between firms such as those and firms which will eventually decide that enough is enough and refuse to call the last raise:
"There’s no other rational explanation to what they’re doing other than trying to find the number where people start to drop out,’ says the managing partner of a Washington-based firm in the AmLaw 100. ‘And once people drop out of the horse race, there’s going to be a smaller number of competitors for the best law students.’"
Are we in, then, for another round of escalation? Of course; the only questions of interest are when and by how much. Aggravating the problem (if you’re not a New York "bulge bracket" firm, at least) is a fundamental supply/demand imbalance. AmLaw 200 firms hire about 10,000 associates every year, or fully one-quarter of the 40,000 who graduate from ABA-accredited law schools. Of necessity, firms are reaching farther down into the pool, while at the same time firms that insist on limiting themselves to the top X% from the top Y schools have no choice but to pay top dollar.
The real crunch comes for firms at about the $1-million/year profit per partner level. At that level, a junior partner is probably making little more than a senior associate at New York scale. The economics of the associate/partner dichotomy, in other words, are showing severe stress.
Why does this matter? After all, the junior partner is still making more than when he/she was an associate, and isn’t the trajectory going to be ever upward? Not so fast. While that’s true within the four walls of the firm in question, there’s an enormous and increasingly transparent lateral marketplace out there. As the cost structure of firms in the $1-million PPP range is pushed relentlessly upwards, firms with superior financials are increasingly attractive to lawyers who can bring business along with them. And this, Dear Reader, is where the vicious "run on the bank" cycle can begin to kick in:
- Partners with meaningful books of business begin to seek greener pastures where they’ll be recognized for it;
- Depleting the firm’s revenue with their departures;
- Causing remaining clients to wonder what’s going on and perhaps begin re-examining their relationships with the firm;
- Further eroding profitability;
- Making the position of most of the remaining partners—and essentially all of the associates—more tenuous and punching morale in the stomach;
- Leading, potentially, to the catastrophic death-spiral which ends in only the least marketable, least mobile lawyers hanging on for dear life.
It can happen with shocking rapidity.
And yet, and yet: Few things are harder in life than to admit one isn’t prepared to keep up with the creme de la creme. Not only is it emotionally and professionally traumatic, one quite rationally fears the repercussions from the oh-so-public admission.
Studies that videotape dogs with a sore paw or minor joint ailment consistently show that in the presence of people and other dogs, the ailment is gamely concealed and the dog acts as if all’s right with the world; but as soon as the room is empty, the ailment is attended to and the affected limb visibly favored. In other words, it’s one thing to be hurting; it’s altogether different to be hurting in public.
But the "hurt" inflicted by the steadily rising New York scale will, at some point, cause firms to drop off the escalator. Whether they do so before, or after, they put themselves at risk of a run on the bank is for them to decide.
The associate salary spike wars are not over; a temporary truce has merely been called.
Prepare for the segmentation to accelerate.
