Law school can be thought of as a Harry Potter-style “sorting hat” for law students (as Dave Hoffman suggests). Similarly, the recent round of pay raises can be thought of as a sorting hat for law firms.
Nathan Carlile has this excellent article in the current issue of the Legal Times:
Call it a near miss.
Earlier this year, New York’s Simpson Thacher & Bartlett raised starting salaries for first-year associates to $160,000. In the competition to recruit top talent, the tactic was similar to one used by Kenyan marathon runners: a midrace burst to separate elite competitors from the pack of pretenders.
But while Simpson’s bump momentarily opened up a $25,000 gap between top-end New York firms and their Washington counterparts, the pack soon matched the move. Eight months later, starting salaries for first-years at most of the 200 largest firms nationwide remain bunched at $160,000.
More discussion — including rumors of Skadden leading a new round of pay raises in New York City — after the jump.
Later on in the article:
“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.”
But isn’t having profits per partner below $1.5 million “second class,” at least compared to New York? And are non-New York firms showing some undue bravado in acting so blasé about the pay raises?
[A]ccording to revenue and expense growth figures compiled by Citigroup’s private law firm banking group, firms in the bottom half of The American Lawyer’s AmLaw 200 are struggling just a bit to keep up. In the first six months of 2007, AmLaw 100 firms saw expenses rise at 14.4 percent while revenue increased at 14 percent. By comparison, firms in the AmLaw 200 saw expenses move up 12.2 percent while revenue came in at 11.4 percent growth.
It also seems that D.C. law firm partners think the world revolves around them:
Based on conversations with more than a dozen Washington managing partners, there is a strong belief that January’s salary raise had less to do with competition among upper echelon New York firms like Cravath Swaine & Moore or Davis Polk & Wardwell, and everything to do with dusting firms based in other markets — including Washington.
“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.”
This is reasonable. But there’s also the possible argument that the New York firms raised in part because they must compete with investment banks, hedge funds, and private equity shops for talent.
(The counterargument to that: the most recent raises still leave lawyers earning much less than their counterparts in finance. In other words, if someone wants to leave a law firm for a bank or hedge fund or private equity shop, a raise in the tens of thousands isn’t going to stop them.)
The article then moves into juicy rumor:
[T]hese days, the impetus for further salary hikes remains squarely in New York’s backyard. In conversations with managing partners, speculation that another first-year pay hike was on the way was pervasive — and unwelcome.
(Several lawyers interviewed in different markets said, unbidden, that they had heard corporate transaction behemoth Skadden, Arps, Slate, Meagher & Flom, a first mover in past associate salary spikes, was contemplating a big bump in first-year pay. Skadden declined to comment.)
Interesting. Since Simpson led the most recent New York pay raise (from $145K to $160K), and Sullivan & Cromwell led the move prior to that (from $125K to $145K), maybe it IS Skadden’s turn.
But not everyone is so confident about a raise:
[C]onsultants are split on whether a raise looms. “I’m hearing the pressure won’t be there,” says Dipietro of Citigroup. “However, I think there will be more programs announced on the variable side where compensation is performance driven, including the performance of the firm.”
Dipietro pointed to the program Sullivan & Cromwell announced last week that will pay senior associates and counsel supplemental bonuses tied to the firm’s financial performance as an alternative to raising salaries across the board.
So what are the implications of all these associate pay raises?
Consultants predict that New York firms — and out-of-town shops intent on keeping the Manhattan market as a significant part of their businesses — will keep on raising pay. But firms without a huge New York presence will eventually give up the chase.
For those that do stay in the game, one consequence of the money being thrown at first-years is the pushing of partner talent both up and down, some industry watchers say.
“The strategy is to drive up the cost structure of the firms with partners making about $1 million,” the chairman of a Washington firm says. “By doing that, they’re trying to attract the business producers from the firms that are declining in productivity.”…Adds Jeffrey Lowe, a Washington recruiter at Major Lindsey & Africa: “The associate pay has wrecked the economics of most firms. Being a junior partner and senior associate are materially the same.”
Even if the move to $160K didn’t succeed in getting the non-top-tier New York firms to “give up the chase,” the next raise might do the trick. And, to play devil’s advocate, is that such a bad thing? Not every firm can be Cravath. So why should every firm pay their associates (or at least their first-years) like Cravath?
Law students pick firms for reasons other than just pay — e.g., prestige, quality of work, location, etc. Why should a firm in the bottom half of the Am Law 100 struggle to keep up with the Cravath pay scale, when it probably won’t get Cravath recruits anyway?
In other words: Are non-top-tier firms struggling to pay $160,000 to their first-years, but ending up with pretty much the same recruits they would have gotten at $145,000?
Washington Firms Assess Price of Staying ‘Top Tier’ [Legal Times]