Posted by: johnocunningham | October 24, 2016

Associate Pay Hikes and Partner Demotions

One of the subjects I write about periodically is law firm management, and two of the most interesting and curious aspects of that subject relate to compensation and partnership decisions.

In recent weeks, I noted a spate of articles about New York firms once again hiking the starting salaries for first-year associates, followed closely by stories about law firms demoting more partners as downward pressure on law firm profits increases. I think the two story trends are related not only by proximity in time, but by cause and effect. It is simply not possible for senior partners to maintain profitability while hiking salary structures without a consequent rise in revenues from their clients (which is not happening). Thus, some partners have to be demoted and take smaller slices of the equity pie  in order to pay for the incoming lawyers.

Of course, now that some NY firms are paying legal rookies as much as $180,000 per year, firms in other cities will probably follow the leader upward on their own pay scales, despite the fact that firms in other cities are not competing with Wall Street for top notch legal talent that otherwise flows into investment banking firms, private equity funds and hedge funds.

There are only so many lawyers that can sign on with investment and arbitrage firms, and there is an abundance of legal talent emerging from the more than 200 ABA accredited law schools each year, so that begs the question of why law firms would base their salary structures on competition with investment firms, which ultimately can offer to graduating students far richer entry-level and partner pay packages, as well as the opportunity to take equity participation in the next “big thing.”

Furthermore, in my experience surveying general counsel, I find that first-year associate compensation is one of the sources of greatest irritation to them, and one of the principle reasons that they seek out and obtain approval from senior management to start building out their in-house departments with more lawyers. Thus, the law firms participating in the race to pay more to associates are spurring on their corporate clients to hire more of the firms’ associates (after they are trained at firm expense) to go in-house. This is creating further downward pressure on revenues.

These firms are also demoralizing many of their mid-tier partners, who are understandably sometimes resentful of their younger colleagues, feeling caught in a squeeze between escalating starting salaries and flattening revenues caused by greater competition.

Another consequence of paying more money to associates is the tendency for partners to expect more of those associates, which puts additional pressure on young lawyers to work harder. That is yet another factor in the rising dissatisfaction with law firm lifestyles. Increasing numbers of bright young lawyers are looking at work-life balance and workplace atmosphere as key factors in deciding where they want to work, and curiously only a small minority of firms seem willing to compete in those areas instead of competing on compensation.

Law firms will never be able to compete with investment firms for dollar upside, but they could compete, if they so chose, on workplace professionalism, collegiality and community integration. Lawyers can compose an important part of every community, lifting the spirits and fortunes of those on Main Street, rather than focusing on Wall Street.  Young lawyers desperately want to be part of their communities, as well as their firms, and they are drawn to the profession in part by endangered notions historically associated with a noble profession – civility, respect, service to others and a code of ethics.

There is a huge opportunity for firms to recruit young lawyers based on commitment to these ideals and to standards of client service and client satisfaction tied to value-based billing and constant attention to improvement in efficiency. Firms that truly make this commitment can survive on a smaller compensation scale, and ultimately they will outlive the firms that are chasing “top dollar.” As they say in the corporate world, “Pigs get fat, but hogs get slaughtered.”

 

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