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Salary Wars Pit Associate Pay Against Partner Profits

Posted Feb 27, 2008 5:31 AM CST
By Debra Cassens Weiss

Associate pay hikes have taken a bite out of profits for equity partners, according to some leaders of California law firms.

Many large California firms matched their New York counterparts last year and agreed to pay starting salaries of $160,000 to new associates. Something—or more accurately, someone—had to give, the Recorder reports.

"The fact is that we only passed on much less than half of the associate salary increases onto the clients, and the partners have absorbed more," Guy Halgren, the chairman of Sheppard, Mullin, Richter & Hampton, told the Recorder. "The partners made less money."

The two biggest costs for law firms are associate compensation and the cost of office space, amounting to about 80 percent of expenses, O'Melveny & Myers chairman Arthur Culvahouse Jr. told the legal publication.

"When you have substantial increases in one of the big expense drivers, it has to affect profits," he said.

Comments

1.

Me
Feb 29, 2008 6:37 AM CST

Well, that’s one way to look at it.  Or, you could look at it in the CORRECT way, i.e., 2000 hrs x $275 /hr = $550,000.  $160/550 is only 29%.  An associate is only getting back 29% of his/her gross billing?!

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2.

Me2
Feb 29, 2008 6:42 AM CST

Yeah, but associates are probably not even entitled to that much once you take writeoffs etc. into account., ,and most lower-level associates have a pretty low “worked” billable rate….

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3.

Me3
Feb 29, 2008 6:46 AM CST

What feature of partner life, other than being able to complain about reduced profits, changed as a result of this?  Spare me the whining.

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4.

Me4
Feb 29, 2008 6:53 AM CST

We are focusing n the wrong issue.  Is it good for the profession, the young lawyer, or the firm to continually ratchet salaries?  Is a first year lawyer really able to meet the pressures and expectations that this level of comp requires?  Are we sacrificing teaching, time to grow, and mentoring for the $.  Or are we creating a generation of billing machines?

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5.

Me5
Feb 29, 2008 8:00 AM CST

As a lawyer at a big firm which has been increasing associate pay in an effort to keep up with the Cal and NY firms,  I believe that partners have little to complain about.  The partners are the ones who chose to raise the salaries.  The associates didn’t ask for it, at least not at my firm, and in fact, most of the associates haven’t wanted the raises because of the prices they must pay in exchange.  And to answer one of the questions previously posed, no, these continued raises aren’t good for the profession, client service, or the young lawyers to continually ratchet salaries.  My perception is that the associates are experiencing substantially greater stress, pressure and dissatisfaction with their jobs.  Depression seems to be on the rise as well as alcohol use.

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6.

H.V. Baxendale
Feb 29, 2008 8:28 AM CST

When firms pay starting associates the large salaries, they feel compelled to recoup it from the associates’ actual billing.  Thus the pressure visited both on the associate and the would-be mentors and trainers—every hour has to count from day one; no more writing off training and observation time.  Back in the day, firms expected to make more from a copy machine than a first year; no longer.  And this effect is visited on all firms of some size, not just Biglaw.  It confirms our slide from a profession to a trade.

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7.

Baldy
Feb 29, 2008 9:13 AM CST

Big firms have nothing of which to complain.  They started the trend and continue it. While money is nice and all my friends from law school would love to pay off their loans, most kids want a decent-good wage, life, and mentoring.  If Big Firms would take that extra 60 k per noobie associate and reinvest it in training, they would get a lot more bang for their buck.  Otherwise, the money wars is just posturing and bragging rights.

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8.

Mike
Feb 29, 2008 10:27 AM CST

Me2, look at collections instead of gross billings.  As a very junior associate, my COLLECTIONS (net of write offs) were over $450K per year and my pay was about $95K at that time.  Don’t tell me my time wasn’t worth anything.

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9.

Ronnie
Feb 29, 2008 10:46 AM CST

Mike, your time IS worth something.  But so is the time of your assistant, the secretaries, the rental fees for the copiers, the cost of rent for the building you work in, the utility costs, the supply costs, etc.  That’s where the rest of your money goes, and so it is with all firms.  I bill $250/hour and have next to NO write-offs (we only have 3 attorneys, we don’t write off our work), and bill 1500 hours/year.  That’s $375k, and I make $70k.  And since I know what everyone here makes, including the boss, I can attest that, at least in my situation, it’s NOT going into her coffers.  Those are factors most associates don’t take into consideration.

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10.

Jack
Feb 29, 2008 11:26 AM CST

I review BSRs. Not a lot of time gets written off on junior associate work.  My firm prohibits writing off signficant amounts of time without approval from the billing committee.

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11.

Julia
Feb 29, 2008 12:11 PM CST

Ronnie makes a good point, but assuming that overhead is 40% of a first year’s pay and salary is 30-40% (assuming 1800 billable, not 2000), that’s 20-30% profit on first years.  The calculations I’ve seen partners provide with respect to overhead are allocated to all attorneys equally instead of pro-rata.  At the low end, it may be more of a 5-10% profit on first years, but it’s still a profit.  I assume summer salaries are built into overhead, which runs at least 300K per attorney at my firm.

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12.

Billpayer
Feb 29, 2008 12:56 PM CST

As one of the in-house counsel paying the obscene fees being charged by some of these firms (until I can replace them) I find the whole thing outrageous.  $160k per year to do legal research and depo summaries?!

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13.

Pitch
Feb 29, 2008 1:04 PM CST

Billpayer - if you would like true value for your money and pay lower rates, please let me contact you.  I work at a good mid-west law firm that handles national work and wins most of the time.

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14.

gazinnia
Feb 29, 2008 2:22 PM CST

@billpayer:  Why does your organization pay it?

Going from BigLaw to SmallLaw the nature of my work hasn’t changed nor its quality.  My billing rate and salary dropped substantially, but my actual personal and professional development time went up substantially.  I’m a better lawyer for it and my clients are getting a better work product.  Most of my colleagues here have a similar pedigree.

So why aren’t more companies giving BigLaw, their billing rates and the billable hour the finger?

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15.

bruinjack
Mar 1, 2008 1:38 AM CST

As a new graduate (2007) who just started in-house, I think the most important point some people have been making here is the development/mentoring time and attention that new law firm associates are likely missing.  My mentor has helped me tremendously in learning not just the ropes but in beginning to recognize and deal with some of the nuances partners in “Biglaw” often don’t even notice.

My pay isn’t anywhere near that of a new associate at “Biglaw” (approx. 60%-70%), but I feel I’m being compensated in many other, more valuable ways.  Then again, my ambition has always been more for learning, development, and significant contribution to an important organization than it is for money.  I always saw a law firm as a hoop I would likely have to jump through on my way (thankfully I have avoided it so far!).

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16.

REB
Mar 2, 2008 4:55 PM CST

I am a trial lawyer at the same firm I joined after a State Supreme Court clerkship 26 years ago.Money,of course,is important but the salary/rate wars in urban areas is insane and counter-productive. The younger partners and associates I work with on national cases are unhappy,over-stressed,and under-trained. The billable hour has toi be replaced for the good of the profession and for benefit of the client.

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17.

InHouse
Mar 3, 2008 11:52 AM CST

The Reasons Big Companies won’t simply drop Big Law is that they have to answer to stockholders, and so when they get hit for a $1Billion verdict, the first question is going to be: “why did you hire a 20 lawyer “discount” firm for this case instead of BigLaw?”  On the flipside, if they lose, the CLO can always say “but President/Board/CEO, I hired the best firm in the country, so we didn’t lose the case becuase of what I did.” 

I think the above is the practical reason why big companies can’t just dump the megafirms.

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18.

Houston Lawyer
Mar 4, 2008 1:50 PM CST

The same issues were around when I was a 1st year associate at a big firm in 1991, when starting salaries were $65K (no “1” in front of that).  We felt at that time that the expectations were too high, and most associates I knew would have been willing to make less, have more work/life balance, and more time to learn and grow professionally.  I think law firms need to stop hiking salaries lock-step and look for other ways to attract top talent.

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19.

Of Counsel
Mar 6, 2008 5:15 AM CST

It’s funny how this myth has arisen that firms are raising their rates to pass on associates’ pay hikes.  Firms are raising their rates to pay for annual partner profit (i.e. pay) increases that far outstrip what the associates are getting.

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