Could Biglaw See Another Associate Pay Raise -- Followed By A Recession?
Another pay raise is possible; another recession is likely.
Another associate pay hike, less than a year after the Cravath-led move to $180K? You’ve got to be s**tting me kidding.
But actually, if you look at the history of pay increases for Biglaw associates, you’ll see that there’s precedent for it. In a very interesting piece for the American Lawyer from earlier this month, entitled The Aftershocks of Big Law’s Associate Salary Hike Are Still Hitting, law firm strategist and former Ropes & Gray COO Hugh Simons points out:
While past performance is not an indicator of future outcomes, history often rhymes. Figure 2 shows associate starting salary levels for the past 20 years. It’s notable that on both occasions in the past two decades when nominal salaries rose, they did so in multiple steps. Over the course of these multiple steps salaries went up 47 and 28 percent, considerably more than last year’s 12.5 percent. Thus, we shouldn’t be surprised if associate salaries go up again in 2017.
Happy Lawyers, Better Results The Key To Thriving In Tough Times
By Hugh Simons (via Texas Lawyer / American Lawyer)
As you can see, associate pay raises tend to “clump” — i.e., one raise is followed by another raise or raises in fairly short succession — followed by multiyear periods of no raises at all. The most recent example of this came around a decade ago. We all tend to focus on the Simpson Thacher-led move to $160K in January 2007 — and understandably so, since it’s the first Biglaw pay hike that Above the Law was around to cover — but we often forget that less than a year earlier, in February 2006, Sullivan & Cromwell had taken starting salaries from $125K to $145K.
Now, let’s not get too excited. I think the likelihood of another pay raise anytime soon is fairly low. First, Biglaw isn’t booming like it was in the early 2000s; the gains are not evenly distributed, with some firms flourishing and others floundering. Second, Biglaw isn’t facing intense competition for talent from other sectors, as it did in the late 1990s (from tech companies in the dot-com boom) and the early 2000s (from finance). Third, clients were none too pleased about the last pay raise. Fourth, if firms have good years, they can just pay robust bonuses, a safer move than increasing the fixed costs of salaries.
But still, I think Simons’s historically grounded observation is interesting. The chance of another Biglaw pay raise for associates might be low, but it’s not zero.
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A second point made by Simons is, sadly, much more likely to come to pass:
The historical data sound a second cautionary note: the timing of associate salary increases may contain information as to the current stage of the broader business cycle. As Figure 3 shows, the last two salary increases have been followed by Big Law recessions, i.e., declines in PPP. This could well happen again; Big Law is a highly cyclical business and we’ve been in boom times (i.e., profits growing) for eight consecutive years.
I made the same point last year:
In February 2000, Davis Polk took starting salaries in New York from $105,000 to $125,000. In March 2001, the post-dot-com recession started.
In February 2006, Sullivan & Cromwell took starting salaries from $125,000 to $145,000. The economy kept on chugging for a bit. In January 2007, less than a year later, Simpson Thacher took starting salaries from $145,000 to $160,000. By December 2007, the Great Recession began.
On the bright side, I think — or hope — that the next downturn won’t be as cataclysmic as the Great Recession. To their credit, firms are actively managing expenses, even though times are still good for many. This is why, despite high partner profits and strong associate bonuses, we’ve seen firms engaging in staff layoffs, closing underperforming offices, and parting ways with less profitable practices. These moves are painful for the affected individuals, but the hope is that a little pain today might help firms avoid a lot of pain tomorrow.
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The increase in expenses driven by the associate pay raises has important strategic implications for firms, and those implications vary depending on a firm’s place in the Biglaw ecosystem, its model of partner compensation, and other factors. As Simons explains:
To most managers, costs going up is unambiguously a bad thing. To a strategist, though, it depends. If a cost increase hurts your competitors more than it hurts you, and you can turn this into an advantage in the market, then cost increases can be a good thing.
In his article, Simons offers smart advice to “super-high profit firms,” on how they can press their advantage, and to “medium-high profit firms,” on how they weather the storm. If you haven’t checked out his piece already, it’s very much worth a read.
As we chronicled in these pages, a surprising number of firms and offices followed the Cravath pay hike, even some that had no business doing so. If these firms see their expenses climb, partner profits drop, and leading rainmakers defect, they may rue the day that they listened to the siren call of Cravath.
The Aftershocks of Big Law’s Associate Salary Hike Are Still Hitting [American Lawyer]
Earlier: Breaking: NY To $180K!!! Cravath Raises Associate Base Salaries!!!
Breaking: Simpson Thacher Raises Associate Base Salaries!!!
Dear Biglaw Firms, Please Don’t Raise Salaries
David Lat is the founder and managing editor of Above the Law and the author of Supreme Ambitions: A Novel. He previously worked as a federal prosecutor in Newark, New Jersey; a litigation associate at Wachtell, Lipton, Rosen & Katz; and a law clerk to Judge Diarmuid F. O’Scannlain of the U.S. Court of Appeals for the Ninth Circuit. You can connect with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you can reach him by email at [email protected].
