Associate pay raises push law firm expenses higher; demand softens while rates rise
Law firms are facing rising expenses that are partly fueled by associate pay raises, according to two reports on the economic outlook for law firms in the first quarter of 2019.
Expenses are rising amid a period of stalling demand and productivity, the American Lawyer reports. On the bright side, law firms saw revenues grow, largely because of billing rate growth.
More than a hundred large law firms increased associate salaries last year at a time of strong revenue growth for top law firms. But this year, “the added expense pressure is beginning to catch up with many of these firms,” the American Lawyer reports in another story.
One of the reports comes from Citi Private Bank. Fifty-three percent of 187 law firms in its sample saw a decline in demand the first quarter, according to its report in the American Lawyer. As firms added lawyers, lawyer productivity declined 1.8%.
On the positive side, revenue growth in the first quarter was 4.5%, and billing rate growth was 4.4%, according to the Citi Private Bank report.
But expenses grew by 6.5%, according to Citi Private Bank. Driving much of that expense growth was a 7.2% increase in lawyer compensation and a 1.8% increase in lawyer head count. “Perhaps the greater pressure comes from the mid-2018 associate compensation increases,” Citi Private Bank reported.
The Thomson Reuters Peer Monitor Index, available here, reported similar results. “The law firm market sputtered a bit in the first quarter,” the report said. “Higher rates were offset by flat demand and falling productivity.”
Direct expenses for law firms increased 4.9% in the first quarter, largely because of increased hiring and higher associate salaries, according to the Peer Monitor report. Overhead expenses, meanwhile, grew by 3.4%.
With increased associate salaries, law firms also are feeling pressure to increase compensation for junior partners. The impact could affect lawyers, as well as their firms. Law firms feeling the pinch can’t afford to ignore underperforming lawyers, practices and offices, experts told the American Lawyer.
