The good times rolled

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A noteworthy item in the National Law Journal today, interesting for a bunch of reasons. The thrust of the article is that with a recession likely to arrive in 2008, associates at many top US firms are likely to see an end to the salary and bonus frenzy that has obsessed the legal press for the last year or so. (Starting first-year salaries of $180,000 and year-end bonuses approaching $55,000, in case you’re wondering.)

First of all, I had to smile at this explanatory sentence in the article: “Top firms, for the purposes of this article, compose a group of large New York-based law firms that, generally, copy one another in bonus structures.” That’s odd, because I thought top firms were the ones with lawyers who were, you know, extremely good at what they do and had the respect and loyalty of their clients. But apparently, top firms are the ones that are very big and do whatever the other very big firms do. This is the kind of muddled thinking that permeates too much legal journalism in the US and Canada both: mistaking the small fraction of huge firms retained by wealthy multinationals for the profession at large. The last time I checked the CBA database, lawyers in firms of 100 or more represented about a tenth of the legal population.

Secondly, the article talks up the coming recession, as has become widely fashionable lately and will, no doubt, soon become a refrain in presidential campaigns in the US and possible election calls in Canada. I don’t follow this topic especially closely, but it has seemed to me for a while that the booming economy we hear so much about has boomed for only a small percentage of the population, while real wages for a lot of working North Americans (including lawyers) have been stagnant or worse for awhile now. Banks may be hemorrhaging money in the wake of the subprime mortgage fiasco (and the imminent subprime credit card fiasco), but you could argue what we’re seeing is the financial sector coming down to earth and joining the rest of us. Of course, it’s the white-hot financial sector that has been driving “top firm” profits recently, so you can see how some white collars in those firms are now getting a little tight. (Gerry Riskin was on top of this months ago, at any rate.)

But thirdly and most interesting are the strategic implications of the salary hike. Bruce MacEwen has theorized, astutely, that part of the reason for the associate salary escalation is that some of the biggest firms are trying to price associates out of the reach of their competitors; Messrs. Cotterman and Henderson suggest much the same in this piece. The indisputable fact is that if firms are doling out barrels of cash to associates, most of whom are learning to be lawyers on the fly and not justifying those prices, there must be many more barrels of cash still in the vault. As I’m fond of saying, whenever someone complains again about pro sports salaries, no player ever put a gun to an owner’s head and forced him to offer a huge contract. Likewise, it’s the partners, not the associates, pushing the salary drive, and they’re not doing it because they’re generous souls — they’re doing it because they perceive a market advantage they can leverage, and they’re going after it tooth and claw.

It won’t be the recession that ends this particular strategy, of course — there’ve been recessions before, and standard law firm SOP in these situations is to freeze salaries, eliminate bonuses and lay off associates. For most firms, associates are fungible and can be collected or dismissed at will; the partnership draw is the king on this chessboard and will be protected at all costs. But clients are the ones who will really put an end to firms’ use of associates as tactics, because it’s the clients who are filling those barrels of cash. Increasingly, clients are pressing upon firms the not-really-novel idea that an associate is not a stone in a revenue pyramid, but an asset whose costs and benefits are seriously out of whack. By the time the next boom-and-bust rolls around, I strongly suspect that many firms will have to rewrite their playbooks, because associates will no longer be in the variable side of the ledger.

Update 1/10: The first pebbles of the rockslide? Venerable NY firm Cadwalader lays off 35 associates. (Tip to WSJ Blog).

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