Show Me the Money!

Show Me the Money!

Money shouldn’t be the primary motive for a career move, but it’s an important factor. In a down market, lawyers have little bargaining power; but in good times, law firms compete financially for the best and the brightest. Historically, elite New York law firms led the pack in associate salary increases, and other firms struggled to keep up. The rationale is that, in a very competitive marketplace, prominent law firms throughout the U.S. want the same lawyers and can’t risk losing the most desirable candidates because of money. Smaller and regional business law firms usually pay somewhat less than megafirms in the same markets. Firms in less competitive practice niches can pay significantly less.

In a strong legal market, top law firms between the coasts and outside of large cities also feel the pressure to raise their associate salaries. But they don’t need to go quite as high as their urban counterparts because the cost of living in those areas is much less. Keep in mind, however, lower base salary outside of the major metropolitan areas often is better or equal in buying power than the highest compensation at top tier urban firms. For example, adjusted for the cost of living, New York City associates earning top dollar for high billable hours can make significantly less per hour in actual dollar-power compared to associates at comparable firms in the Midwest, which pay less and require fewer hours.

Historically, associate salaries increase during good economic times, and either stagnate or decline during downturns. For example, during the dot-com boom of the late 1990s, the most competitive firms raised salaries for first-year associates to $125,000 base, plus generous bonuses. Then, base salaries remained flat for about five years, when the dot-com bubble burst and there was less competition to hire and retain armies of new associates. Firms offered signing bonuses or attractive year-end bonuses, as necessary, to entice the best and the brightest, while holding the line on salaries.

Again, as the economy heated up after 2006, and there was a need for large numbers of junior associates, firms engaged in a salary war. Base compensation for entry-level associates at the top firms rose to $145,000 and then $160,000 by 2008. During the downturn following the financial crisis of late 2008, base compensation for new lawyers remained frozen at $160,000 at the top firms, with a solid second tier paying $145,000.

Only in mid-2016 did associate base salaries rise again when Cravath led the pack to $180,000. Virtually all major firms followed suit—more than 125 large firms did so— with a few even topping it by $10,000 or more to set themselves apart. The 2017 annual survey of midlevel associates at Am Law 200 firms showed average salaries of $198,913 for third-years, $216,482 for fourth-years and $238,984 for fifth-years. But the reality is that the most recent raise just kept up with inflation since, according to the Consumer Price Index’s inflation data, $160,000 in 2008 is equivalent to $184,000 in 2017 dollars.

Note that these salary numbers and raises applied only to the top Am Law ranked firms, not the majority of U.S. law firms. The median salary earned by first year law firm associates nationwide in 2016 was $135,000, which was the same as in 2015, according to NALP data.

To retain seasoned associates when top firms increase entry-level base salaries, mid-level and senior associates must get raises, as well. Often, however, there is compression with a reduction in differentials between class years, so firms can keep the overall cost of associates in line. Consequently, the financial focus on attracting new lawyers leaves some of the more senior associates disgruntled and looking for greener pastures.

To circumvent these issues, and in response to financial pressures on large law firms during the Great Recession, some firms moved away from the traditional class-year lockstep and instituted a core competency model of associate progression and compensation. Those firms divided associates into three or four bands, established a set of skills and accomplishments required within each band, and compensated associates within each band the same or similar amounts. As associates mastered the required competencies and progressed up the bands, their compensation increased. Thus, associates of the same class year could receive different compensation, depending upon their proficiency. Merit differences between associates within each band are accommodated through discretionary bonuses, without affecting base salary.

Astronomical associate salary figures may not be as attractive as they first appear. The money must come from somewhere to pay those inflated salaries. As compensation goes up, often associate billable hour requirements and/or billing rates increase, too. Firms may also free up funds by cutting benefits and investment in technology and real estate, or they can make it even more difficult for lawyers to achieve equity partnership. Moreover, if law firms’ finances feel tight, layoffs can happen more quickly than past years. Instead of six months of declining revenue before a firm makes cuts, perhaps it will wait only two or three months. In 2017, several firms reduced lawyer headcount nationwide. Among them was Seyfarth Shaw, who cut 40 attorneys in addition to staff.

Unsurprisingly, respondents to the 2017 Midlevel Associates Survey at Am Law 200 firms—where most received salary bumps—were happier with their compensation than they were in 2016. Once the hoopla over money dies down, however, associates are left with the realities of their jobs. So, when considering a job change, a wise lawyer looks beyond the salary negotiations and focuses on the opportunity itself. Although it’s tempting to go for the gold, money isn’t everything.

Valerie Fontaine
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