NY To $190K: An Addendum On Leverage
In figuring out which Biglaw firm will bring us the next pay raise, it's important to consider the concept of leverage.
Last week, I offered some thoughts on which Biglaw firm might lead the next round of pay raises. I nominated Cravath, which in many ways is still the leader of the pack when it comes to New York’s elite, old-guard, white-shoe firms. (I didn’t focus on places like Wachtell Lipton and Quinn Emanuel, which are a bit different — younger and more narrowly focused in their practices compared to places like Cravath, Sullivan & Cromwell, Davis Polk, and Simpson Thacher).
A reader raised this important point in response to my article:
Have you considered writing about the role of leverage in the jump to $190K? On a profits-per-partner basis, Skadden (with a leverage of 3.5) would have an easier time raising salaries than Davis Polk (4.9), to the tune of about $45,000 per partner (assuming $30k raises across the board). In a world where firms game many of their accounting measures to boost PPP [profits per partner], I’m sure a margin of that size enters the calculus.
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As noted in the American Lawyer’s latest ranking of firms by profitability, part of the recently released Am Law 100 rankings, leverage “is the ratio of all lawyers (minus equity partners) to equity partners.” The higher a firm’s leverage, the more an associate pay raise will cut into partner profits. For example, if a firm has leverage of 5 to 1 — i.e., five lawyers (excluding equity partners) for every one equity partner — giving every lawyer a $20,000 pay raise should increase overhead and reduce profits per equity partner by $100,000 (5 x $20,000). (Note: that example admittedly oversimplifies things a bit, but you get the point.)
As suggested by the reader comment posted above, it seems reasonable to assume that all else being equal, a firm with low leverage would be more willing and able to raise associate salaries than a firm with high leverage. It also seems reasonable to assume, based on the history of Biglaw pay raises, that the salary hike will come from a super-prestigious firm.
Every year, our friends at Vault rank the nation’s 100 most prestigious law firms. If you take the top 15 Vault firms and rank them by leverage according to Am Law, here’s what the list looks like (from lowest to highest leverage, and with Vault rank in parentheses after each firm’s name):
1. Covington & Burling (V13) – 2.09
2. Wachtell Lipton Rosen & Katz (V1) – 2.11
3. Gibson Dunn & Crutcher (V11) – 3.08
4. Quinn Emanuel Urquhart & Sullivan (V15) – 3.32
5. Skadden, Arps, Slate, Meagher & Flom (V3) – 3.47
6. Kirkland & Ellis (V7) – 3.61
7. Sullivan & Cromwell (V4) – 3.71
8. Latham & Watkins (V10) – 3.80
9. Simpson Thacher & Bartlett (V6) – 4.14
10. Cravath, Swaine & Moore (V2) – 4.24
11. Davis Polk & Wardwell (V5) – 4.86
12. Cleary Gottlieb Steen & Hamilton (V8) – 5.36
13. Boies, Schiller & Flexner (V12) – 5.38
14. Weil, Gotshal & Manges (V9) – 5.48
15. Paul, Weiss, Rifkind, Wharton & Garrison (V14) – 5.80
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In the reader poll accompanying the last NY to 190 article, which asked you to vote for which firm would lead the next round of pay raises, the most popular answer was “the field” (i.e., a firm other than the five named firms of Cravath, Davis, Simpson, S&C, and Skadden). So let’s review this list of prestigious firms ranked by leverage and see if we can identify a few more possibilities.
The top of the list is Covington & Burling. Covington is an amazing firm, but I doubt it will lead the “NY to 190” movement. First of all, it’s not an “NY” firm — although it has New York offices (very nice ones, in the New York Times building), it’s still a D.C. firm at heart. Second, Washington firms historically haven’t been compensation leaders — and Covington in particular has sometimes disappointed its associates on the bonus front. This shouldn’t be shocking; by Biglaw standards, Covington’s PPP of $1.275 million puts it in the bottom half of the Am Law 100.
Next up: Wachtell Lipton. Wachtell does have the profits to sustain a pay raise — $6.6 million, an all-time high for the Am Law 100 — but it’s such an outlier already on comp that it doesn’t affect the rest of Biglaw much. In recent years, it has paid bonuses equal to 100 percent of its (already above-market) base salaries, but that hasn’t led to a Biglaw-wide pay hike. (By the way, if you can confirm WLRK’s bonuses from the past few years — our last story about them was from January 2014 — please email us or text us (646-820-8477).)
The third firm on the list is Gibson Dunn — interesting. I’m old enough to still think of Gibson as an L.A. firm, but today it’s really a global one — an extremely prestigious and profitable global law firm, with almost $3.2 million in PPP. So I wouldn’t rule out GDC leading the market higher; it is, to its credit, a firm that cares about keeping its associates happy. (Recall how it upgraded its West Coast bonuses in response to associate discontent.)
The fourth firm on the list, Quinn Emanuel, is an even more likely candidate. It’s obscenely profitable ($4.4 million in PPP in 2015), its leverage isn’t too high, it likes getting good press, and it has played a role in the pay raise wars before (back in 2005, when it raised starting salaries to $135,000, above the then-prevailing rate of $125,000).
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And here’s another reason QE might be the first mover: last year it dramatically scaled back its summer program, shifting to a model that focuses more on hiring associates out of clerkships (wooed by $75,000 signing bonuses, above the $50,000 going rate). So raising starting salaries for first-year associates — to $180,000, $190,000, or whatever John Quinn fancies — would be a great way of inflicting compensation costs on competitors that QE won’t have to bear quite as much itself. Paying $180K or $190K to 50 or 100 first-year associates will hurt the Simpsons and Skaddens of the world, while Quinn can pay the new, higher rates to a significantly smaller number of associates: the people who come through its scaled-back summer program, 3L recruiting, and hiring out of clerkships. (These are, by the way, numbers that Quinn can adjust far more easily in response to its own needs compared to firms relying on the traditional recruiting model, which essentially requires firms to commit to hiring a year before they know how many associates they need.)
The next five firms on the list — Skadden, Kirkland, S&C, Latham, Simpson, and Cravath — all have leverage in the 3.5 to 4 range, ample prestige, and high profits per partner. So they’re all possible leaders in the move to a new pay scale.
The final five firms — Davis Polk, Cleary Gottlieb, Boies Schiller, Weil Gotshal, and Paul Weiss — are unlikely to lead the move to NY to 190. They all have leverage of 5 to 1 or higher — and if you have that kind of leverage, a pay raise will cost you dearly. You’ll do it if you have to, but you wouldn’t initiate it. The only possible contender here is Davis — which at least has leverage under 5 to 1, and which has led a pay raise in the past 15 years.
Would an associate pay raise be a good idea? Some fear that increased compensation costs for large law firms could lead to more layoffs. But let’s set that grim possibility outside for the time being, and vote in this revised poll on who will take the market higher (now with a whopping ten options):
Who will lead the next round of Biglaw base salary raises?
Loading ...Firms Ranked by Profitability [American Lawyer]
Earlier: NY To $190K: Who Will Lead The Charge?
NY To $190K: 5 Arguments In Favor Of A Biglaw Pay Hike
Biglaw Firms Must Conduct More Layoffs, Before It’s Too Late
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 dlat@abovethelaw.com.
