Law Firm Salaries: Am I Having a Bad Dream?
Someone tell me I’m having a bad dream and will awake soon.
The greatest gift offered to law firms in the recent economic downturn was the first realistic opportunity in decades to break their own cycle of shame/pain to rebuild their compensation structures. They had the economic justification to cut back on some of their more extravagant hiring practices (like hiring 100 associates each year when they only intend that 20 will make it to partner). As a result of the client-led (r)evolution, firms started to push forward a focus on “value” rather than “prestige” pricing based on top-level comp and regularly rising rates. But now it seems that law firms are turning up their noses and are returning the gift they were given: maybe it wasn’t exactly what they wanted.
I’ve been hearing rumbles, now confirmed in articles such as this one that firms are proudly announcing that they’re returning to pre-2008 salary levels and upping their starting associate comp back to $160,000+ (and therefore the salaries of everyone up the ladder in firms that still use lockstep comp systems also goes up). Seems that firms are doing gangbuster business “selling” their entry associates’ work to clients — they can’t get enough! Or maybe it’s just that there aren’t enough entry-level lawyers for all the first year jobs that firms have to fill? Not.
Let’s just pretend that this is truly a necessary step for firms (which I’m not buying for a minute); the optics of this are so awful that I’m shocked anyone would want to announce their intentions to raise salaries where clients will read about it. Set aside the issue of whether increases like this will really attract the best associate candidates or only the ones most interested in the money. Do firms think that raising entry-level salaries and then raising rates to pay for it actually impresses clients? Is this how law firms flex their muscles so we can see how strooooong they are, even if it does nothing to promote their intelligence or value? We at ACC know that too many clients are still too beholden to the “prestige” or legacy factors inherent in hiring the most expensive firms. Sometimes those firms truly do provide great service; but an increasing number of other firms are capable of delivering similar results without the higher costs and clients are more and more likely to try them out. And the latter firms are getting more and more attention — firms that ignore this, do so at their own peril.
Many large firms have been caught for decades in a ridiculous and self-fueled cycle of “Keeping Up With the Joneses”, wherein firm management bitterly complains that while they know their comp systems are not based on sound business principles, they claim to be victims of a marketplace in which they can’t hire anyone worthy of their firm if they aren’t paying more than the other firms in town. Since we see no shortage of smart talent graduating from law school each year, many of us had a sneaking suspicion that the reason the firms kept raising starting salaries was more connected to a decision about what the partners in the firm were making or wanted to make.
In general, I have no problem with firms paying whatever they want for talent, especially lateral talent. Frankly, clients shouldn’t have to be worried about what firms set as their standards for comp if the firm is pricing its services in a manner that the client finds reasonable and valuable. But most firms are about to approach their clients and suggest they need an increase in fees, dictated by rising costs, that they’ve just invented.
Wouldn’t it be wonderful if more firms adopted a different approach that might include:
1) a commitment to hire new entry lawyers at whatever they believe those lawyers are worth, and they plan to invest in them and train them so that they will succeed;
2) offering new lawyers promotions and higher compensation as they master certain competencies, and that clients thus will not be charged for their services in a manner that is not commensurate with the value of the work they can provide; and
3) a commitment not to raise salaries and therefore costs and thereby request an increase in fees, but rather a commitment to take a page from the client’s business management book, and look for ways to lower client costs by increasing the firm’s efficiency or productivity, or structuring their staffing or costs based on what the client wishes to afford.
There are a lot of firms out there doing this, and their efforts are far too often not noticed — visit ACC Value Challenge to read about firms that are working hard to do better: And let me shout out a few here that are putting their money where their mouths are in terms of deploying new comp systems that incent value: Howrey, Drinker Biddle, McKenna Long, Valorem, Morgan Lewis, Sutherland, and many more. Have they figured it all out? Probably not and they’ll continue to struggle to get it right. But they’re positioning themselves not just for profitable relationships with their own lawyers and clients, but for long-term success as firms.
To leaders in firms considering whether to return us to the madness of ever-upward-spiraling salaries: Please stop. Your clients know that the emperor has no clothes. Are you really going to tell them you can’t hire talent unless you increase the rates of starting associates in your firm? Clients are watching to see what you do. So I’d suggest this is your chance to lead, rather than claim you have no choice but to follow.
