Cravath, Swaine & Moore raised first-year associate salaries from $160,000 to $180,000 — the first increase since January 2007. As most law firms followed suit, some clients pushed back.
“While we respect the firms’ judgment about what best serves their long-term competitive interests,” wrote a big bank’s global general counsel, “we are aware of no market-driven basis for such an increase and do not expect to bear the costs of the firms’ decisions.”
Corporate clients truly worried about the long-run might want to spend less time obsessing over young associates’ starting salaries and more time focusing on the behavior of older attorneys at their outside firms. In the end, clients will bear the costs of short-term thinking that pervades the ranks of big firm leaders. Some already are.
Well-paid lawyers never generate sympathy. Nor should they. All attorneys in big firms earn far more than most American workers. But justice in big law firms is a relative concept.
Back in 2007 when associate salaries first “jumped” to $160,000, average profits per equity partner for the Am Law 100 were $1.3 million. After a slight dip to $1.26 million in 2008, average partner profits rose every year thereafter — even during the Great Recession. In 2015, they were $1.6 million — a 27 percent increase from seven years earlier.
In 2007, only 19 firms had average partner profits exceeding $2 million; in 2015 that group had grown to 29. But the average doesn’t convey the real story. Throughout big law, senior partners have concentrated power and wealth at the top. As a result, the internal compensation spread within most equity partnerships has exploded.
Twenty years ago, the highest-paid equity partner earned four or five times more than those at the bottom. Today, some Am Law 200 partners are making more than 20 times their lowest paid fellow equity partners in the same firm.
It Gets Worse
Meanwhile, through the recent prolonged period of stagnant demand for sophisticated legal services, firm leaders fueled the revolution of partners’ rising profits expectations by boosting hourly rates and doubling leverage ratios. That’s another way of saying that they’ve adhered stubbornly to the billable hours model while making it twice as difficult for young attorneys to become equity partners compared to 25 years ago.
The class of victims becomes the entire next generation of attorneys. Short-term financial success is producing costly long-term casualties. But those injuries won’t land on the leaders making today’s decisions. By then, they’ll be long gone.
Why should clients concern themselves with the culture of the big firms they hire? For one answer, consider two young attorneys.
Associate A joins a big firm that pays well enough to make a dent in six-figure law school loans. But Associate A understands the billable hour regime and the concept of leverage ratios. Associate attrition after five years will exceed 80 percent. Fewer than ten percent of the starting class will survive to become equity partners. Employment at the firm is an arduous, short-term gig. In return for long-hours that overwhelm any effort to achieve a balanced life, Associate A gets decent money but no realistic opportunity for a career at the firm.
Associate B joins one of the few firms that have responded to clients demanding change away from a system that rewards inefficiency. Because billable hours aren’t the lifeblood of partner profits, the firm can afford to promote more associates to equity partner. Associate B joins with a reasonable expectation of a lengthy career at the same firm. Continuity is valued. Senior partners have a stake in mentoring. The prevailing culture encourages clients to develop confidence in younger lawyers. Intergenerational transitions become seamless.
Associate A tolerates the job as a short-term burden from which escape is the goal; Associate B is an enthusiastic participant for the long haul. If you’re a client, who would you want working on your matter?
The Same Old, Same Old
As clients have talked about refusing to pay for first-year associate time on their matters, big firms’ upward profit trends continue. But the real danger for firms and their clients is a big law business model that collapses under its own weight.
As it has for the past eight years, Altman-Weil’s recently released 2016 “Law Firms In Transition” survey confirms again the failure of leadership at the highest levels of the profession. Responses come from almost half of the largest 350 firms in the country. It’s a significant sample size that provides meaningful insight into the combination of incompetence and cognitive dissonance afflicting those at the top of many big firms.
When asked about the willingness of partners within ten years of retirement to “make long-term investments in the firm that will take five years or more to pay off,” fewer than six percent reported their partners’ “high” willingness to make such investments. But at most firms, partners within ten years of retirement are running the place, so the investments aren’t occurring.
Almost 60 percent of firm leaders reported moderate or high concern about their law firms’ “preparedness to deal with retirement and succession of Baby Boomers.” Meanwhile, they resolve to continue pulling up the ladder, observing that “fewer equity partners will be a permanent trend going forward” as “growth in lawyer headcount’ remains a “requirement for their firms’ success.”
Do law firm leaders think they are losing business to non-traditional sources and that the trend will continue? Survey says yes.
Do law firm leaders think clients will continue to demand fundamental change in the delivery of legal services? Survey says yes. (56 percent)
Do law firm leaders think firms “are serious about changing their legal service delivery model to provide greater value to clients (as opposed to simply reducing rates)”? Survey says no. (66 percent)
Do clients think law firms are responding to demands for change? Survey says most emphatically no! (86 percent)
But do law firm leaders have confidence that their firms are “fully prepared to keep pace with the challenges of the new legal marketplace”? Survey says yes! (77 percent)
If cognitive dissonance describes a person who tries to hold two contradictory thoughts simultaneously, what do you call someone who has three, four or five such irreconcilable notions?
At too many big law firms the answer is managing partner.