I promised my editor I'd stop writing about law, but some issues just drag you back in....
The latest convulsion in the legal community involves a jump among top tier firms to $160K for first year associates. Many say this is absurd - that these new lawyers could never be worth that much money. That's immaterial. The market is what the market is, and $160K is below, not above, what the market should be paying first year associates.
I can't get into every element of associate compensation, and I'm not going to get hyper-detailed in this off-the-cuff analysis. I'll focus on four simple points.
1. Partner Profits
Yearly profits per partner at some firms in Philadelphia are in excess of $1,000,000.00. Those numbers derive in substantial part from aggressive cost cutting. There has been a vicious weeding out of "service partners" over the past few years, and most associates who stay at a firm long term are now shuffled into "non-equity," "membership" or "of counsel" status as opposed to real partnership, causing the partnership pie to be cut a lot less.1 Still, $1,000,000.00 plus in a place like Philadelphia? There are clearly more crumbs to hand out.
2. Does the "Rule of 3" apply anymore?
Firms used to assess associate profitability based on whether the associate realized three times his salary. But that was when firms were carrying numerous practice groups which weren't profitable in order to provide a full service platform to clients. Those "loss leader" departments have been jettisoned over the last few years. Firms have also been hiring contract lawyers from temporary staffing agencies at a small fraction of the cost per hour of an associate to do much of the commodified grunt work associates did in the past. These are just two of many cost cutting measures utilized.
If firms are cost-cutting so dramatically, are they still using the Rule of 3 or something close to it to determine how much to pay associates? And if they are, given the change in the cost structure, why? Is it possible they are using the salary increases as a justification to move up their own draw at a rate in excess of the associate raises? The difference between the partners' increased take and the associates' increased take since the start of the salary wars may be a hidden partners' margin from which associates could derive a salary more in line with the value of the services and economic benefit they provide to the partners. Which leads to the third issue...
3. Associates need as much money as they can get
Law is a business, and the people who are now and will in the future get paid seriously are those with clients. Very few associates can expect to generate anything approaching the seven figure book of business that is necessary for job security in the lateral market. Many will be shuffled off to in house jobs or forced to work for substantially less at smaller firms or kept in less lucrative non-equity positions for years. Many view working at large firms as a short term way to pay off loans over five to eight years, and the firms in turn view them as fungible labor. Assuming most associates have anywhere from $80,000.00 to $150,000.00 in student loans (an average debt load which will increase, tuition hikes tracking associate pay increases), and assuming when they leave the big firm world they'll have to take a pay cut, often around the same time they are building families, associates need all the money they can get. A lot of older attorneys or those underpaid at smaller firms scoff at this idea, suggesting these top level associates are a thin slice of lawyers who are already grossly overpaid. Maybe that's true, but as their salaries go so go everyone else's. Shut your mouth.
4. $190,000.00 is a better number
Let's assume a first year associate at a top tier firm has or will have will have a billable rate of $300.00 to $350.00 per hour. If he works 2200 hours and realizes only 75% of his billable time, the firm will generate between $495,000.00 and $577,500.00 on his labor. The firm still receives a premium above the adequate margin it reaches at 2 ½ and 2 ¾ times his salary under the new stripped down cost structure, and he gets enough money to build a nest egg for the likely day when he has to jump and take a cut or see his income plateau.
I don't suggest this as something partners should be compelled to do out of fairness. The responsibility for pushing the market rate higher falls on associates. Don't let the wave you've got behind you crash. Start hitting the internet...
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1 For non-lawyers, "service partner" = equity partner without business.
Posted by PhilaLawyer at 2:05 PM