9/11/16

LATE: Thoughts on Associate Salary Increases

I was recently asked my opinion on associate salary increases (no, really. It's not like I have any compunction about foisting my unsolicited opinions on the world). I told the person I would get back to them. That was a couple of weeks ago. And I still don't have anything resembling a coherent position. I am of many minds:

Tribal affinity. I was a BigLaw associate. I am still drowning in law-school debt. It is hard for me to begrudge associates their first raise in a decade. Inflation-adjusted salaries for associates at top firms have increased about 25% since 1986 (while the cost of living in New York, where the elite firms who started the avalanche are located, increased substantially more). Profits per partner, meanwhile, are up 225% in inflation-adjusted terms over the same period. Making associate salaries the symbol of law-firm profligacy is like foreign aid serving as the rallying cry for fiscal conservatism.

Tribal affinity II. Except it really is a potent symbol. I was also an in-house counsel who occasionally encountered a junior associate of limited value (not their fault) and thought to myself, "This person makes more money than me." I admit it, I'm petty. Going in-house was a conscious choice. But I'm not alone in my resentment:
The newspaper also spoke with an unnamed chief litigation officer for a Fortune 100 company who also questioned the need for the pay raise. The chief litigation officer said a lawyer in the company’s litigation department with 20 years of experience doesn’t make $180,000. “Why would we ever think a first-year associate is worth that?” the lawyer said.
Quite a way to remind clients of all they fund beyond the mature domain expertise they actually value. It was a move guaranteed to engender client backlash and further fuel some threatening trends in client/firm relations. But firms still fell all over themselves to keep up with Cravath.

Keeping up with Cravath. Cravath, Wachtell, et al. I have cognitive dissonance because I don't really think of them as part of the general BigLaw market despite the fact that I recognize their role in driving that market (Cravath salary scale, Cravath bonus scale...). I've never found fault with the idea that there are elite lawyers and elite firms who are sought after to handle price-insensitive work. Such work exists. Clients pay a premium for it. Cravath, Wachtell, and a few others are undeniably in that class and are in many ways immune from most of the forces I drone on about.

But work is finite, especially price-insensitive work. And clients are getting more discerning about what they put in the price-insensitive bucket. It's easy to understand why the AmLaw 5 firm thinks they need to keep up with Cravath. But it is hard to understand why the AmLaw 95 firm thinks the same

Or is it. The game is follow the leader. AmLaw 5 is competing with Cravath. AmLaw 10 is competing with AmLaw 5. AmLaw 20 is competing with AmLaw 10. And so it goes down the line. AmLaw 95 is not trying to keep pace with Cravath, they are keeping pace with AmLaw 85.

Keeping up with Cravath II. And while a few law firm partners may be almost as venal and petty as me, it probably isn't pure ego.

There is client chatter about the New Normal. But many successful partners have not encountered it yet. They still operate in a world where law is a credence good. How much associates are paid is among the many status signifiers (impressive zip codes, lobby art, watermarked business cards) that communicate, "Don't worry. We got you. No one ever got fired for hiring [prestigious firm]." Not paying associates the going rate might be seen as evidence of diminished stature.

It is easy to imagine associate salary increases coming up as a negative the next time a firm seeks rate increases. "Rule No. 1 of associate raises is that partners do not pay for the raise.” Clients may push back on the basis that they are not going to foot the bill for delusions of grandeur.

But it is just as easy to imagine the mirror-image discussion if the firm declines to increase salaries. A firm that doesn't raise compensation has less of a claim to 'market' rates since they clearly do not consider themselves in the same class as their peers.

Moreover, large, diverse firms are not monoliths. There is plenty of intrafirm variation. You can be AmLaw 150 in profits per partner but still have a viable claim to the best tax or real estate practice around. Which herd is the firm trying to run with?

Clients notice. So do the laterals who might hesitate about moving to a firm perceived as falling behind the pack.

More of the Same. Maybe this is the straw that breaks the camel's back. More likely, it is just another straw because, well, inertia. Regardless, it is absolutely a sign that law firms expect the status quo to reign for the foreseeable future.

Yet even those of us partially inclined to yawn cannot ignore it. Above the Law's traffic went through the roof [every associate who got a raise should be sending lavish holiday gifts to Cravath's Executive Committee and the ATL editorial team]. And the story continues to occupy considerable mindshare.

The big story in law (measured by attention) is therefore something along the lines of: Rich lawyers give slightly more money to not-as-rich lawyers based on belief that other not-as-rich lawyers (inside counsel) will send them high-margin work regardless. 

That the story consumed so much oxygen manifests a lawyers-only view of the world. Obviously, the legal world is, by definition, lawyer centric (though some misguided souls argue it should be client centric). But delivering legal services is increasingly a team sport. The question of how domain expertise is leveraged through process and technology, not just additional expensive bodies, keeps growing in importance. Yet, unsurprisingly, I didn't hear anyone at ILTAcon discussing commensurate raises for allied professionals. The caste system remains intact.

I have no idea what Perkins Coie pays their associates. But I'd wager that hiring Toby will have a more significant impact on the firm's cost and performance (and revenue and profitability) in the near, medium, and long term than whatever decision they made on salaries. That the firm has now also lured Keith Maziarek away from DLA Piper is an absolute coup. Add a new, change-agent CIO in Rick Howell, and you can start to tell a story that should be far more important to clients than what associates make. But I doubt an item about a firm assembling a process/pricing/tech nerd dream team among its leadership would get one percent of the client attention or peer-firm mimicry of an elite New York firm marginally increasing salaries of people who already work there.

Likewise, I must have missed the media circus when Christopher Ende left Goodwin Procter to become the Law Firm Pricing, Solutions, and Panel Management Leader at GE. But knowing Chris (from conferences; no intimate knowledge of his role/plans implied) I suspect that his hiring will be more meaningful to the industry than whatever Goodwin pays its associates. If Chris does a quarter of what Vince Cordo has done since he left Reed Smith to join Shell, we're in for a wild ride.

Which, of course, means I've come back to my evergreen themes: (i) clients demanding change and (ii) allied professionals playing a critical role in both making and satisfying those demands. Neither really has much to do with associate salaries.

If clients truly care, then the salary increase is a big deal. If clients don't really care, then it isn't. Truly caring would mean changing purchasing behavior.

Referencing associate salary raises to score rhetorical points in the midst of a rate discussionwhere negotiating down the size of the annual rate increase has somehow been reframed as getting a 'discount'is not altering behavior. You are still just having a discussion about rates. You might consider a different conversation.

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D. Casey Flaherty is a consultant who worked as both outside and inside counsel and serves on the advisory board of Nextlaw Labs. He is the primary author of Unless You Ask: A Guide for Law Departments to Get More from External Relationships, written and published in partnership with the ACC Legal Operations Section. Find more of his writing here. Connect with Casey on Twitter and LinkedIn. Or email casey@procertas.com.


Some bonus material for those not offended by the length of my posts.

More of the Same II. You get what you reward. We're rewarding the same things in the same way as before. So behavior is unlikely to change much.

There is a genuine question of whether most firms are even increasing total compensation to their associates. Only after we get through bonus season will we know which firms are actually paying their associates more overall and which firms just moved bonus money into salaries.

Whether or not total pay is actually up, clients should absolutely take an interest in comp structure (and fee structures, governance, succession, process, training, tech, etc). The incentive that clients are rightly worried about is that the perceived increase in fixed costs will drive firms to (a) raise rates and (b) demand more hours from their associates. But these have been the dominant trends since forever. Annual rate increases have come to be regarded as natural law. And most law firm bonuses have been premised on hitting/exceeding hours for decades.

It's not that incentives don't matter. I'm just not sure they have shifted in any meaningful way.

Keeping Up With Cravath III: The herd is strangely selective when it comes to mimicking the elite firms. Keeping pace on salaries is relatively easy. But what about lockstep partner compensation? Ruthless brand discipline? Etc. When you bring those up, you get all kinds of "we're different", "they're different", "that won't work here", "you don't understand"....which is often true enough. Still, the idea that a firm is keeping up with Cravath or Wachtell because they pay their associates the same salary seems to get the causation backwards (you are not elite because of what you pay your associates; you are able to pay associates because you are elite).

I appropriated this from the estimable Bruce MacEwan:
So what does this putative firm of the future look like?
For as long as I’ve been in and around this industry, I have heard ad nauseum infinitum that firm ABC or XYZ, whether or not they had any remotely plausible aspiration to these leagues, only wants to act on the “highest value,” “price-insensitive,” “bet the company,” “make or break,” “premium work.”
Your day has arrived. You may wish it hadn’t.
Because what is the model I’ve sketched above? It’s a model, as a partner at an AmLaw 10 told me last week, with “clients who are happy to pay $1,100/hour for me but not $400/hour for even a qualified midlevel associate.” What is that model?
Wachtell.
We’re all Wachtell now, if we can pull it off.
But I put this squarely in the category of “be careful what you wish for,” since “being Wachtell” is far more challenging than being a typical AmLaw 50-ish firm—no offense to those of you in that category.
Let’s back up: I have a confession. I used “We’re all Wachtell now” calculatedly. The phrase—the very mention of the firm’s name—can inspire envy in the ranks of those who subscribe to the notion that their firm needs to be in that top right quadrant of the 2 x 2 matrix, the “highest value,” “premium work,” etc., engagements. And of course, who can object to Wachtell staking out its own party-of-one place in the PEP stratosphere?
But that’s not all the Wachtell model is about. There are two other critical elements more challenging to embrace: (1) that 1:1 partner:associate leverage, and (2) their intense focus on highly specialized and narrow lines of business, without deviation.
Achieving (1) is going to require wrenching changes in almost every firm that chooses to go down that path, and it can risk introducing centrifugal forces that can tear the place apart before you can achieve the goal.
And as for (2), it requires saying No relentlessly, and many more times than you’ll ever get to say Yes.
Are you game?
And if not, what’s your plan?

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