What Do -- And Should -- In-House Lawyers Think About The Biglaw Pay Raises?
There's a range of opinion in the in-house community on this hot topic.
In our coverage of the Great Associate Salary Raise of 2016, we’ve focused on the Biglaw perspective, examining the compensation increases from the perspective of associates, counsel, and partners. But what about the people who ultimately make the pay raises possible: the clients?
In response to Ron Friedmann’s tweet, I had this exchange with former in-house lawyer Casey Flaherty:
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Flaherty isn’t the only current or former in-house counsel with reservations about the Biglaw pay raises. Here is what our very own Susan Moon had to say when I reached out to her:
In general, I don’t think that first associate salaries are reflective of the value that these lawyers provide their clients. Perhaps it depends upon the type of legal work (e.g., students get some more litigation-related training in law school (moot court, legal writing, etc.), compared to transactional law training, which most lawyers get absolutely none of in law school), but first year associates are basically learning on the job and making tons of mistakes early on as corporate associates. What other industry pays top dollar for service providers who have minimal to no training? Even doctors who graduate after 4 years of med school get much lower pay during their residency (i.e., training) years.
And no self-respecting large law firm will let a first year’s work product go out unchecked by a more senior attorney, so instead of billing just the first year attorney’s time, the senior attorney’s time gets billed as well (when the senior attorney alone could have sufficiently completed the work). I think it really evidences a large law firm disconnect from reality (paying huge salaries for subpar value provided). Because of this, many large companies that have the leverage refuse to pay for first year associates’ billables. I understand that junior attorneys need training, but considering how much money these large firms make, why should the client have to pay for it?
Fellow Above the Law in-house columnist Mark Herrmann, a longtime Biglaw partner before he went in-house, sounded less opposed:
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The raise affects different people at different times. For associates, the effect is immediate: They get a raise next month. For partners, the effect is delayed: They may be paid less — next month or in nine months, depending on how profits are distributed – if the firm’s (and their own) performance was the same this year as last. And clients don’t notice the change, if at all, until the next negotiation over rates.
Even then, we’re not negotiating rates with ‘the market.’ We’re negotiating rates with three or four key firms that were surely affected by many things over the past year other than an increase in associate salaries. Thus: For associates, enjoy your new-found wealth. For clients, I suspect it’s wait and see.
I’m closer to Mark’s view than to Susan’s. This sentence is key: “clients don’t notice the change, if at all, until the next negotiation over rates.”
In the near-decade since Simpson Thacher raised to the $160K scale, Biglaw firms have been raising rates on clients every year (at least nominally; there has been some discounting, especially in the wake of the Great Recession, but that’s harder to track). But during this whole time, associate base salaries haven’t budged (yes, bonuses have been good in recent years, but they’re not guaranteed and come at year-end).
If law firms raise rates regularly, shouldn’t their hardworking associates benefit from some of that increase? It seems reasonable to me to shift some of the compensation risk back toward the partners, which is essentially what happens when associates get bigger base salaries. (Waiting until the end of the year and paying good bonuses, while nice, forces associates to share with partners the risk of how the year goes — even though associates don’t get partner-size rewards for a good year.)
I think Craig Silliman, general counsel of Verizon, put the point very well (commenting to Casey Sullivan for a very interesting Big Law Business piece on whether the “follow Cravath” model of setting comp makes sense):
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To the degree that law firms are reallocating their profits by giving first year associates higher salaries, then this is about their internal business model and it doesn’t affect me. We don’t pay for first year associate work, but to the degree that the firms are raising salaries across the board and they try to push through these pay increases in higher billing rates, then it simply encourages me to look for alternatives, whether moving the work in-house or moving work to lower-price firms.
Exactly. To put it another way, going from $160K to $180K represents a 12.5 percent increase, but no firm will (or will be able to) hike rates on clients by 12.5 percent in the next negotiation. So this associate pay raise really is, as Silliman puts it, about Biglaw’s internal business model. If firms try to pass too much of their increased overhead on to clients, the clients will balk — and in this day and age, with competition from great boutiques and alternative legal services providers, clients have significant leverage.
To all our in-house readers, especially those who did Biglaw stints before moving to the client side, don’t begrudge Biglaw associates their pay raises. They have way more student debt than you ever did; they need that extra cash to pay their bills. You still have interesting work, a great mix of legal and business issues, and — on the whole, there are exceptions — better work-life balance.
Rest assured that, even after their latest raises, most Biglaw associates would kill to be in-house counsel.
Is Following Cravath’s Lead the Best Way to Set Salaries? [Big Law Business]
David Lat is the founder and managing editor of Above the Law and the author of Supreme Ambitions: A Novel. You can connect with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you can reach him by email at [email protected].
