ABA Journal

New Normal

Associate salary increases may not be good business

By Patrick J. Lamb

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On June 6, Cravath Swaine & Moore announced it was raising base salaries for starting associates from $160,000 per year to $180,000 per year. Of course, firms never give a raise to just one class of associates. There is a “ripple effect” throughout all associate classes, and Cravath raised salaries of all of its associates between $20,000 and $35,000 per year. In the days following, one large firm after another matched the Cravath raise. By now, most of BigLaw has matched the raise.

I couldn’t be happier. Why? Because this is just another straw these firms are adding to the backs of their clients. For some clients, it will be the straw that breaks their back and causes them to break free of the bond that BigLaw has on them.

First things first. Every associate getting the benefit of a raise should send a thank-you note to the leaders at Cravath. Unless, of course, the associates would prefer not to have the burden of higher expectations that follows raises of this sort. Associates must understand that Rule No. 1 of associate raises is that “partners do not pay for the raise.” That is, the money needed to pay for the raise does not come from the partnership profits. Rule No. 2 of associate raises is “see Rule No. 1.”

So where does the money come from? It comes from clients’ wallets. That is, after all, where all money a firm spends comes from. Clients pay for the firm’s high-priced real estate, the expensive artwork, personnel costs and associate compensation, including every nickel of these salary increases. The hidden question is how do firms accomplish this added wealth transfer.

Start by thinking about the numbers. If a firm has 500 associates, and the average of all raises is $25,000, the total additional revenue needed by the firm is $12.5 million. At an average of $500 per hour, 25,000 additional hours have to be billed.Actually, when you factor in write-offs and realization rates, the number is closer to 30,000 hours. So each associate will be expected to bill at least 60 hours more a year. Every year. Some associates may do that with little effort, but with excess capacity continuing to be a problem at many firms, it might not be so easy. From the associates’ perspective, I suspect many would trade the raise for the time.

As I mentioned, the money to pay for these raises comes directly from the clients of the firms who retain Cravath and the many BigLaw firms that have followed Cravath, like sheep following a leader off the edge of a cliff. One must wonder how many firms asked their clients about their interest in paying higher amounts (higher rates, to be sure, but also more hours on the same matters). If a firm asked, I suspect clients would have said no.

Instead, firms rationalize the increase. One friend of mine said: “It’s only $10 an hour.” What he meant was that if an associate works 2,000 hours a year, clients only have to pay $10 more for each hour to cover the cost of the raise. Put the write-offs and realization adjustments aside. For a client that pays $3 million a year for associate time, at the $500 average cost per hour, the cost to the client is a minimum of $60,000 a year of added cost for no added value. We know the No. 1 challenge clients face every year is doing more with less. And make no mistake, the “more” is a lot more. Every year.

Perhaps firms do this because matching Cravath is essential to hiring the best talent. This hypothesis doesn’t withstand scrutiny, however. If you look outside the law, companies like Google have significant data to show that class rank and other markers relied on by firms do not make for better employees. But maybe law firms are different? Not so much. Only a tiny fraction—less than 5 percent in most firms—of new associates make equity partner. Firms turn over associates in huge numbers. Many partners arrive as laterals.

So why do firms do it? Cravath does it because it can. It is good for its image. It may help it recruit the talent it wants. But Cravath is one of a handful (literally) of firms that lives on bet-the-company matters, where cost is never a concern. But what about the firms that don’t handle solely bet-the-company matters? These are the wannabes, as in they wannabe like Cravath—or the delusional, as in they think they are just like Cravath. But the wannabes and the delusional are not like Cravath. These firms have clients that are cost-conscious. I suspect many clients will complain, and some will move some or all of their work. For some, this raise is the one that broke their backs. For others, it is just the next straw, getting firms that much closer to putting the last straw on their clients’ backs.

History may prove the leaders of the wannabe and delusional firms to be geniuses. Or it may prove them to be like the leaders of GM and Ford in the 1960s, who were unconcerned about their cost structures and the prices of cars they sold, opening the door to Toyota and Honda and other foreign car companies to enter the market and claim more market share every year. In 1954, GM’s market share was 54 percent. In 2009, GM filed for bankruptcy. GM’s market share today is about 17 percent.

At some point, smart leaders think first about the customer. And if law firms had smart leaders, there wouldn’t be stories about associates getting raises like this.

Patrick Lamb is a founding member of Valorem Law Group, a litigation firm representing business interests. Valorem helps clients solve their business disputes and cope with pressures to reduce legal spend using nontraditional approaches, including use of nonhourly fee structures, coordination with LPOs or contract lawyers, joint-venturing with other firms and implementation of project management tools to handle lawsuits or portfolios of litigation.

Pat is the author of the books Alternative Fee Arrangements: Value Fees and the Changing Legal Market and Alternative Fees for Litigators and Their Clients. He also blogs at In Search Of Perfect Client Service.

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