Have Law Firm Salary Hikes Spread to In-House?

According to Altman Weil, the answer is yes. Of course, one should be very wary of studies like these. There are a lot of factors that are taken into consideration when corporations set salaries for attorneys. I wrote an article about this a few years ago. My data is a little dated, but the general parameters are still applicable.

The actual study (which accounts for regional differences) is quite pricey. You might want to check with your law school career services office or law library to see if they have a copy (or might be willing to buy one.)

The Vault rankings are out!

I was on vault.com today and noticed that the firm rankings for 2008 are out. Of particular interest are their Quality of Life rankings with the Top 20 Law Firms to Work For. Looks like McKee Nelson takes the top overall honors this year.

I always find the "hours" section of the quality of life rankings particularly interesting. Winstead Sechrest is ranked 6th this year for hours, which comes on top of their announcement last week that they will not raise first year salaries to 160k (unlike many of the big players in Texas), instead focusing on a higher bonus structure. Another Texas-based firm, Thompson & Knight, also made the best hours list. On the other end of the spectrum, Thompson & Knight was one of the first Texas-based firms to raise salaries recently. I wonder what effect this will have on the rankings for these two firms next year?

Suzanne Howe
BCG Attorney Search, Texas

Success is Failure

I work with a personal trainer who just taught me a new Orwellian phrase: Success is Failure. He was talking about the fact that in order to build muscle strength, you need to work your muscles to failure. But I think the phrase has a lot of relevance to the practice of law.

Before I explain, I just want to say for the record that I don't plan to write anything else in this space about the recent spate of salary raises. While I reserve the right to completely change my mind (and I am perfectly fine if my guest bloggers decide there is more to write on the subject), I believe that far too much time and energy is wasted in the legal profession worrying about maximizing income in the short run. Sure, 10-15K can be a very nice addition to an already nice salary; but as I have already said in earlier posts (e.g. here and here), I believe there are much more important things to worry about in the long run.

For example, aren't you better off in the long run if you work for a firm where you are valued, where you have a shot at partnership and where you are being mentored on how to build a practice? You will earn a lot more in the long run if you can market effectively and you will be much more successful in marketing yourself if you enjoy what you do and are given a lot of opportunities to get visibility, meet clients, etc.

Which leads us back to Success is Failure. In sales, it is important to fail. If you don't fail, then you aren't doing enough because nobody lands every prospective client. Failure is a sign that you are taking some risks.

So try to practice at a firm that is happy that you are trying to build your visibility and pleased that you are meeting potential referral sources. Join a firm that accepts failure as part of the business development process. If you simply choose to maximize income in the short run, you may find that your short term success leads to long term failure. In the short run, the firm that is paying top dollar may expect you to bill out maximum hours leaving little time for anything else. If you take the long view, then you may fail to maximize income in the short run; but you will experience much more long term success.

Boston v. NYC

With the exception of Fish and Richardson, it's beginning to look like Boston firms will not follow the lead of Simpson Thatcher (at least not in Boston.) WilmerHale, for example, has raised starting salaries to 145K (except for New York where they have followed the market.) But that still doesn't mean that associates in New York are better off. If you have the option of working for a large firm in either city, don't forget two important variables--cost of living is higher in New York and on average, associates in New York work longer hours. There is a good post on this on Greedy Boston .

First of all, if the focus is going to be on the money, let's take more than a cursory glance at the numbers. According to ccnmoney.com, what costs $135k in Boston costs $207k in NYC. Groceries, housing, utilities, transportation, and even healthcare are all more expensive in NYC than in Boston. So NYC firms pay better than Boston, but not enough to provide a comparable standard of living. Moreover, you'll be working a hell of a lot more in NYC than you will in Boston. To put it simply, the difference between NYC wages and Boston wages isn't enough to logically. justify a preference for NYC over Boston on wages alone. There has to be something else, such as culture, location, opportunities, etc., that warrant such a decision. I know too many people who regret being sucked into NYC because they used to think it was the cool, hip place to be. Don't make the same mistake.

A Dilemma for Non-New York Firms

This post on the Greedy Boston Board of Greedy Associates highlights the dilemma that the New York salary wars has created beyond the Big Apple. To the junior associate or law student, it is difficult to justify accepting an offer from one top firm if another top firm is paying a higher salary (or paying a higher salary in their New York office.)

But the economics of New York practice are not the same in other markets. Larger deals enable firms to operate with greater associate leverage (i.e. more associates per partner) and billing rates in New York tend to be higher as well. Most businesses recognize that they need to pay more for talent in New York than elsewhere in the country so why should the practice of law be any different?

Several of the New York firms have purportedly raised salaries in their Boston offices (e.g. Weil, Proskauer and Skadden will pay their new Boston associates $160K.) I imagine that fear and a robust demand for legal talent will ensure that within a few months, firms like Wilmer, Ropes and Goodwin will do something as well for their Boston hires.

But what if you have accepted an offer from a firm that decides not to budge? What if you work for one of those firms and know that one of the higher paying firms is hiring in your practice area?

As I said a few posts ago, I strongly believe that it is important to stay focused on the big picture when analyzing this situation. Intangibles are far more important in the long run and if you are in an environment where you are thriving, think twice before chasing the money.

I do think that firms who choose not to raise will need to articulate a good rationale for paying "below market". But a number of firms successfully did this during the last boom by demonstrating what the firm has to offer beyond a very large paycheck. In addition, some of the firms that chose to follow the market are no longer in business. So just remember that maximizing your income today, may not serve you well in the long run.

Mr. Smith's Rules of Driving

When I took driver's ed in the 1970's, our teacher introduced us to Mr. Smith's Rules of Driving. It was a quaint film done in the 1950's and had the feel of Father Knows Best (i.e. it was clearly lacking the whiz bang production qualities that a younger generation would expect.) But to this day, I still remember those rules (at least some of them--1. Keep those eyes moving 2. Keep the big picture, and my personal favorite, 3. leave yourself an out.)

As I think about the latest salary wars that are raging in New York (and likely to catch fire in other major legal markets) I suddenly realized that those driver's education rules have direct relevance to the associates who are receiving (or not receiving) these pay hikes.

Salary is obviously a very important reason we all work. But it is important to "Keep the big picture" when thinking about salary. Sure it is nice to have another $15,000 in your pocket after working hard. But keep in mind that depending on your tax bracket, $15,000 is probably less than $10,000 after taxes. More importantly, how much difference will this $10,000 make in your life in 5 years (even if you earn this additional sum for 3-5 more years?)

IMHO, it is more important that you are laying a good foundation for your future success and career satisfaction. If you like your current firm and think you have a shot at partnership (or at least believe that you are developing the skills you need for success) , does it make sense to make a lateral move just to increase your income in the short run?

Of course no one wants to get paid less for equal work so undoubtedly, the wave that began in New York will continue to spread around the country. But if you remain at a firm that elects not to follow suit, consider whether making a lateral move now will do anything for you in the long run. I wrote about this 6 years ago when Testa Hurwitz (which dissolved a couple of years ago) started driving up salaries in Boston.

If your only goal in working for a top firm is to pay off debt, then by all means, "Keep those eyes moving." But just remember that the good times that are driving this salary war will not last forever. We only need to look back to the earlier part of this decade to know that building good relationships with partners in your firm is the best way to "Leave yourself an out" when work slows down.

The New $100,000

I remember, and not so very many years ago, when the associates' committee I served on had to convince our firm to bring first year salaries up to $100,000 to be in parity with the market. Our firm wasn't a market leader, but we definitely tried to keep up. Of course, by the time you read this post, two or three other firms will have already followed Simpson Thatcher's lead in bringing first year salaries up to $160,000, and perhaps beyond it.

I am not a number-cruncher so I don't have any gee-whiz statistics to wow you with. Nor do I think $160K is going to bring the legal community to its knees. Neither is it really that remarkable. Simpson's move is just one more step in the direction of an important trend.

Of course law firms need to keep attracting strong talent, of course rates are continuing their march toward the infinite. Frankly, the big boys can afford $160K, and more. But there is a catch. No, it is not just "more hours." Associates and partners alike are already putting in "more hours." What this really signifies is that the "class" distinctions between lawyers are widening, and there will be no reversal of that trend.

Higher salaries are an easy call for an economist. Market conflation means that fewer firms are market leaders on an increasingly shrinking planet. When attorneys from Atlanta can represent Norwegian interests in Costa Rican factories for products distributed in Africa, under Singapore law, you know that you are working in a global market. This means that fewer firms competing for a large, and increasingly sophisticated pie of high-quality work.

So what?

Well. This means that competition for the best talent will only continue to spiral. But more importantly, there will be less and less room for error. Associates at premier firms are already walking across a tight rope. That won't change--although the wire is getting higher and higher. The real, rubber-hits-the-road change, is that the safety net for those who falter is getting smaller, and farther away. Why? The largest firms are not only international powerhouses, of course, but they are grabbing up the premier domestic work. The market of "safety-net" firms has, and will continue to shrink. Bottom line: blink and you will be out of the promised land, your salary will shrink by a third, perhaps more, and the doors to ground-breaking work will be increasingly closed to you. You'll be on the outside, looking in, and the glass is getting thicker.

Enjoy the money. No pressure.

Trends in Partner Compensation

Yesterday, I participated in a teleconference hosted by Hildebrandt. Here are the main points raised by the speaker:

1. A high percentage of firms currently have open compensation systems (i.e. where attorneys know what their partners earn) but the trend is to move away from these systems.
2. Money alone is an ineffective motivator (unless it is a lot of money.) Internal fairness is more important.
3. A good practice is to conduct pre-compensation interviews with each partner and focus on the future (i.e. the goals for the coming year for that partner.) It is best to have two partners in the room to conduct the interview.
4. It is common now for partner income to fluctuate (up and down). This reflects a maturing market for legal services and the need to keep the "keepers" happy.
5. Practice groups are playing a bigger role now in law firm management.
6. The most successful firms use subjective rather than formulaic (or objective) systems to set comp.
7. Seniority is becoming less of a factor in setting partner comp.
8. What is keeping the client at the firm remains the number one factor in setting partner comp.
9. Firms are starting to move away from lock step systems (even at the associate level.)
10. Comp differentials from highest to lowest paid partner are increasing (5:1 or 6:1 is not uncommon.)
11. Good practice is to limit the number of salary steps so that partners do not overly compare their comp with other partners.
12. Hildebrandt advocates using a prospective comp system with a bonus pool at the end of the year of 4-15% to fix any "mistakes" that might have been made during the year.

Open vs. Closed Pay Systems

Is there a trend towards closed pay systems (i.e. where partners do not know what other partners earn?) Seems like a good idea to me. This is particularly true in larger firms where you may not know a lot of your partners. Of course, then you have to trust that your compensation committee operates fairly and according to clear guidelines.

Billings and Originations are Leading Factors

Altman Weil has released the results of its 2006 survey of compensation systems. Billings and originations remain the top two most important factors in determining compensation, particularly at large firms. Also worth noting is that almost 85% of firms with 100 or more lawyers now have 2 tiers of partnership (up from about 65% in 2003). At most firms, good citizenship gets relatively little weight. Strange way to run a business!

Do Latest Salary Hikes =More Billable Hours

Not according to my colleague Carey Bertolet in the New York office of BCG. Sure there will be less tolerance for associates who are underperforming; but this hike is really an incremental raise.

I part ways with Carey wrt the last big raises in 2000. I believe these raises did change billing expectations (at least in departments that had the work.) But those raises were more dramatic (more than 30% in some cases.)

Are Salary Increases Justified?

72% of associates say yes according to an unscientific poll.

Justified or not, aren't the salary increases just the free market at work? Or is it that law firms are too risk averse to hold the line? Noone wants to miss out on recruiting the best talent.

But associates consistently say that salary is not the most important factor in recruitment. So why have all of the top firms followed suit?

Are Salary Hikes Necessary?

Several consultants seem to think so. They argue that the dramatic growth in law firm size has increased the demand for top talent. So has the dramatic increase in law firm profitability (in 1986 only 2 law firms had gross revenues in excess of $100 million; in 2005, 184 law firm exceeded that figure.)

Will $10,000 of pretax income cause a law student to choose one firm over the other? Perhaps. But surveys consistently show that today's law school graduate are much more concerned about quality of life.

Associate Billing Rates--Not Much of a Spread?

According to a recent survey by Altman Weil, associate billing rates do not very that much by size of firm. I have not looked at their methodology so I can't comment on the accuracy of these numbers. But I was a little surprised.

Maybe the differential gets larger if you look at senior associates at large firms vs. senior associates at small firms. But Altman Weil didn't run this analysis.

Radio Broadcast on Salary Increases

BCG's Carey Bertolet, my colleague in NY, is a featured guest in a discussion of the latest salary increases. What are the implications of this trend? What about the majority of law school graduates who will not have the credentials to join a large law firm?

Do Starting Salaries Matter?

Starting salaries for attorneys have jumped 250% in the past 20 years and the latest round of salary wars shows that no major law firm wants to be left in the dust. But do higher starting salaries really have that much impact on entry level recruiting? I wonder. In the meantime, you can be sure that no major firm is taking a chance.

What About Starting Salaries at Smaller Firms?

The legal press likes to report salary wars at large firms. But since most of the bar doesn't work at a large firm, it is interesting to note what smaller firms are paying. Altman Weil has some numbers to report. While larger firms are clearly able to pay substantially more to newly minted lawyers, smaller firms are not as far behind as you might think.

Salary Raises Not Evenly Distributed

As large firms raise starting salaries to $135K across the country, many firms are opting to keep salaries lower in secondary markets; though not all.

Debt Rises Faster than Salaries

Law firms may be raising salaries all over the country; but law school debt is rising even faster according to the NLJ.

2005 Bonuses are Coming in Large

The National Law Journal is reporting that 2005 was a very good year for associate compensation. Many associates at the largest firms around the country are seeing $20,000 to $60,000 in bonus pay.

Salary Hikes Spread to Atlanta

The national trend at large firms has now spread to Atlanta where starting associate salaries are now $115K at some firms.

Predictions for 2006 and What they Mean

The Legal Times has offered some predictions for 2006: Mergers mania will continue and New York and DC will remain very important markets for firms trying to create a national footprint; salaries will continue to increase as competition for hot talent heats up; billing rates will start to flatten out as corporation try to reign in costs; firms will look for ways to control their own costs; and client relations will be more important than ever as companies consolidate the number of firms they use.

So what are the career implications? Make sure to cultivate relationships outside your firm. Developing your own clients is the only career protection you can count on.

Finnegan Raises

More salary increases.

Salaries in CT on the Rise

CT law firm salaries continue to lag far behind Boston and New York. But CT firms are following the upward trend already seen in California.

Survey on Median Billing Rates by Practice Area

Altman Weil has just published the results of a national survey of median billing rates by area of legal specialty. No big surprises here but it is still interesting to see the numbers.

Salary Hikes on the West Coast

Could the salary wars be starting again? In Silicon Valley that seems to be the case. My prediction: within 6 months, Boston firms will follow suit.