Stats Of The Week: The Great Associate Pay Raise Of 2016
What story do these numbers tell?
A little more than one year ago, Cravath, Swaine & Moore raised associate salaries to the $180K scale, launching the Great Associate Pay Raise of 2016. With the added insight that comes from the passage of time, what can we say about the big pay hike’s consequences for Biglaw?
In a very interesting, extensive article over at the American Lawyer, Katelyn Polantz explores that question. I recommend that you read her article in its entirety. To whet your appetite, here are some selected statistics from her piece.
The move to the $180K scale was the first Biglaw pay raise since Simpson Thacher’s adoption of the $160K scale in January 2007. Taking inflation into account, how much was $160K in 2007 worth in 2017 dollars?
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A $160,000 paycheck in 2008 was worth $184,000 in 2017 dollars, according to the Consumer Price Index’s inflation data.
How many firms followed Cravath’s move, in whole or in part?
By the end of June, 101 firms had announced a match to the $180,000 starting salary, according to a real-time tally of announcements by the blog Above the Law. Some firms did not increase their pay for older associates quite as high as the Cravath rates, though. Other firms only raised in certain cities, or made increases that did not reach the $180,000 level for first-years. Meanwhile, a few firms moved above $180,000. In the months that followed, another two dozen or so large firms announced increased associate salaries.
What effect could the pay raise have had on summer associate hiring for 2017?
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[T]he American Lawyer’s 2017 summer associates survey shows summer hiring down 2 percent year over year. The projected average class size for incoming associates dropped to 38.6 new lawyers from 40.4 the previous year.
How much did this pay raise cost various firms?
At Dechert, the firm’s 563 associates cost an extra $5 million or $6 million last year, because of the Cravath-scale increase, Dechert chief executive officer Henry Nassau told American Lawyer earlier this year. (The firm did not respond to a request for comment for this article.) The firm’s profit margin dropped from 46 percent to 44 percent, according to Am Law 200 data.
At Wilmer Cutler Pickering Hale and Dorr, the firm swallowed a $10 million added expense because of the associate salary increase, Wilmer’s co-managing partner Robert Novick says. Wilmer’s profit margin was unchanged at 44 percent, Am Law 200 data shows.
Did some of the pay raise get passed along to clients in the form of rate increases?
Of 50 firms that provided ALM billing rate information this year and that pay $180,000 for first-year associates, 35 firms said they increased billing rates by more than 3 percent in 2016. Four out of five firms in the same group say they plan to increase billing rates by more than 3 percent this year.
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But remember, as Polantz notes, that “incremental price increases are part of doing business.” During the decade or so that associate salaries remained flat, Biglaw firms were consistently raising rates by a few percentage points each year.
From the prior starting salary of $160,000, the move to $180,000 represented a 12.5 percent increase. But no Biglaw firm we know of could (or did) raise its billing rates by 12.5 percent in a single year. Instead, firms raised rates by low-single-digit percentages — which they pretty much do on an annual basis. So even if clients indirectly paid for some of this pay raise, they certainly did pay for all of it.
Should we feel bad for Biglaw partners having to shoulder the cost of this pay hike?
“There are so many things we consult on from an economic standpoint. This isn’t one of them,” Tom Clay, a law firm consultant with Altman Weil, said this spring. “This will not be an economic event.” Firms aren’t “wasting away,” he added. Partners “still have their homes [at] the ocean and [in] the mountains.”
Indeed. Let’s close with this statistic, from the 2017 Am Law 100 rankings:
Average profits per partner in 2016: $1.66 million, up by 3 percent (compared to 4 percent last year).
Hit or Miss: The Associate Salary Hike, One Year Later [American Lawyer]
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 dlat@abovethelaw.com.
