Associate Overcompensation?

As Jim Cotterman points out in Compensation Plans for Law Firms 4th edition, the whole issue of associate profitability gained prominence in recent years because the economics of associate compensation changed.

In former times, associates in their early training stages got very low salaries. They also had very low hourly billing rates. Clients understood that they weren't usually getting enormous value from an hour of work by a new trainee, but they were getting more or less what they paid for.

After an extended round of associate salary and rate raises a few years back, however, increasingly budget-conscious and assertive clients became reluctant to pay for an associate to sit in on meetings as an observer, or to pay for a slow trainee to accomplish what an experienced lawyer could do quickly at a lower total cost.

As described in the following article abridgements from A&FP sibling publications, associate salaries and rates are headed up once again, pressures from cost-conscious clients notwithstanding. I have a possibly discomfiting view to offer on this, but first let's take a look at the bandwagon effect now in progress in some major U.S. legal markets.

Atlanta

[From a January 12 article by Meredith Hobbs in Fulton County Daily Report.]

Alston & Bird's move to hike associate pay in its Atlanta office is reshaping the local salary market. In the last week, Sutherland Asbill & Brennan, Greenberg Traurig and Smith, Gambrell & Russell also sweetened associates' salaries, matching Alston's across-the-board increases that now start first-years at $115,000.

That followed immediate across-the-board increases at King & Spalding, Troutman Sanders and Morris, Manning & Martin after Alston's announcement.

Other big firms, including Kilpatrick Stockton and Powell Goldstein, say they will raise associate pay but are still ironing out the details, while one boutique, Bondurant Mixson & Elmore, will match whatever the top Atlanta rate is after the dust has settled.

Alston hiked associate pay by at least $15,000 per class ' the first significant rise in associate pay in the local market since 2000, when big firms increased first-year pay from $75,000 to $100,000.

Morris, Manning & Martin ' along with King & Spalding and Troutman Sanders ' raised pay for its own associates within two days of Alston's Dec. 20 announcement.

“We felt it was crucial to be at the market or, in our case, a little ahead of the market,” said Morris Manning's leader, Robert E. Saudek, who said his firm already paid senior associates more than their counterparts at Alston and King & Spalding. Morris Manning is raising pay by $15,000 for first-, second- and third-year associates and $20,000 for the subsequent classes, he said.

Several of the city's other large firms now have followed suit. At Smith, Gambrell & Russell, managing partner Stephen M. Forte announced a pay increase to his firm's associates Dec. 5. “We're starting our first-years at $115,000. It seems to be where the market has moved,” Forte said, adding that associates across the board would get raises. That is the same amount Alston, King & Spalding, Troutman and Morris Manning are paying first-year associates.

Sutherland Asbill raised salaries for all of its Atlanta associates Jan. 6, meeting the new minimum of $115,000 for rookie associates. The firm also raised pay for third-year associates and above in its Washington and New York offices, said managing partner Mark D. Wasserman.

In Washington, Sutherland upped third-year pay by $5,000. It gave heftier raises to more senior classes, so sixth-year pay went up by $20,000. In New York, the firm upped associate pay, starting with third-years, by $5,000 across the board, which Wasserman said gets salaries up to the going rate for the New York market. Sutherland's third-year associates in New York now make $155,000.

Miami-based Greenberg Traurig has also raised associate pay in its Atlanta office, said local co-leader Allen D. Altman. “Our firm is going to be participating in the salary bump-up for years one to seven, similar to Alston & Bird and King & Spalding,” he said, adding that the firm made the decision within the last week.

Greenberg increased compensation across the board for each class of associates up to the seventh year, commensurate with the raises at Alston and King & Spalding, Altman said, with rookies now starting at $115,000. After the seventh year, the firm looks at associate pay on a case-by-case basis, he said.

Smith Gambrell's Forte pointed out that the Atlanta legal market does not operate in a vacuum. Pay increases in large cities such as New York, Los Angeles and Chicago have a ripple effect on Atlanta, putting pressure on associate pay here, he said.

Los Angeles & San Francisco

[From a January 17 article by Petra Pasternak in The Recorder.]

Days after two big L.A. firms hiked base salaries for associates, San Francisco's Keker & Van Nest announced it was matching the raise. Keker partner Christopher Kearney said last week that the 50-lawyer litigation firm would increase the base pay for first-year associates to $135,000 to compete with three L.A. firms that announced hikes in the past month.

“To get the top people, we need to pay at market,” Kearney said, adding that the firm competes for talent against San Francisco firms and the Northern California offices of L.A.-based firms. Keker also matched increases in the salaries of other classes. Fourth-year salaries are up $5,000, to $170,000, and seventh-years' are now at $210,000.

L.A. firms O'Melveny & Myers and Paul, Hastings, Janofsky & Walker said last week that they'd bump first-year salaries to $135,000 to match Gibson, Dunn & Crutcher's December increase.

In September, smaller Los Angeles firms Irell & Manella, Quinn Emanuel Urquhart Oliver & Hedges and Munger, Tolles & Olson lifted salaries in a market that had been largely frozen since the dot-com days. Given the growing competition for young guns, most local lawyers are closely watching salary developments.

Nossaman Guthner Knox & Elliott just raised first-year associate salaries to the national average of $125,000 effective Jan. 1. Managing Partner Scott DeVries said that's a “good place” and the firm intends to stay there. “We think this is the consistent prevailing rate in the community,” he said. “Of course, if there are material moves throughout the San Francisco marketplace, it's something that we'd need to assess.”

More on California Firms

[From a January 18 article by Marie-Anne Hogarth in The Recorder.]

Wilson Sonsini Goodrich & Rosati will match the increases in base salaries for associates announced by some big Los Angeles-based firms in the past few weeks.

Effective Feb. 1, first- and second-year associates pay will jump $10,000, to $135,000 and $145,000 respectively. Third through ninth-year associates will all get a $5,000 raise. The move places compensation for fourth-year associates at $170,000 and seventh-years at $210,000.

Wilson CEO John Roos said, “Obviously we want to attract the best people to the firm,” adding that Wilson also made the decision based on its performance in 2005 and its position in the market.

According to The Recorder's Associate Salary survey, Wilson's bonuses, as awarded in January 2005 for first-years, fall within a range of $1,000 to $12,000. Fourth-years earn up to $21,000 in bonuses, and seventh-years up to $35,000. Additionally, Wilson awards quarterly productivity bonuses to associates.

Cooley's first-year associates currently earn $125,000, fourth-years earn $165,000, and seventh-years earn $200,000. … Fenwick pays first-year associates $125,000, Davidson said. …

New York-based Skadden, Arps, Slate, Meagher & Flom has been paying $140,000 to first-years nationwide, including in California.

Latham & Watkins remains the only large L.A.-based firm that pays first-year associates $125,000.

A Question of Value

From the vantage point of other articles A&FP has featured last month and this month, the key question about higher associate compensation would seem to be this: Given that only so much cost can be recovered through higher associate billing rates, how can law firms afford such high associate compensation and still make a profit?

My own question, however, pertains to client value: If clients were already concerned that associate billing was excessive, how do firms propose to justify even higher associate rates?

Surprisingly, soaring big-city housing costs and similar factors don't seem to be cited by the interviewees in these articles. The rationale instead is this: Talent is in short supply, and competition for it is fierce, so any salary hike by a leading firm impels other firms in the same legal market to match it. That reasoning seems shaky, though, for several reasons.

Questionable shortage of talent. Given that law firms have such a limited ability to identify future star performers, how well founded is this fierce talent-recruitment competition? If there were an overall numerical shortage of available applicants, the supply-and-demand argument would be comprehensible. After all, teen-agers in Manhattan commonly charged $100/hr for babysitting services this past New Year's Eve ' a combined illustration of intangible value, supply-and-demand, time utility, price gouging, and lay-down customers.

But there are plenty of law graduates each year. Are the sought-after markers of future stardom trustworthy enough to justify a desperate bet-the-firm recruiting posture in making salary offers to associates?

Contrast the situation of law firms with that of professional sports teams. A college sport and its professional equivalent have their differences, but it's the same game. When pro teams bid up the starting rate for a trophy-winning college athlete, there's certainly some risk of disappointment, but they can already see the college star throwing an accurate long pass or sinking a basket from mid-court. Law school and law practice are so different, however, that hiring the most promising law student is an act of faith, not to say a crap shoot. [Managing Editor's Note: It's actually remarkable to think of how few Heisman Trophy winners as the best college football player have productive, much less superstar, professional careers. But at least professional player personnel directors have past performance evidence to validate a high draft pick and resulting large signing bonus and salary.]

Beyond the failure to predict reliably which starting associates will do well, law firms can't even assess accurately how well new associates are doing after the hire. Indeed, many firms use associate salary tiers for the first few years specifically to avoid having to do performance assessments.

Indiscriminate pay boost. In any case, these starting salary boosts don't seem to be just for stars; they're being described in commodity terms!

Roving talent. Finally, even though acquisition of talent is a necessity, that acquisition is not permanent. Like their seniors, associates feel freer to switch firms than in years past. This means a firm could let other firms pay exorbitant salaries to associate trainees, and then later lure away the best of those associates by offering them a terrific salary or a fast track to partnership. (Firms claim they prefer to train associates from scratch in their own way of lawyering, but in practice the choice seems to be between having an associate that you unsystematically mentor vs. one that somebody else unsystematically mentors.)

In short, doesn't it make more sense to pay associate trainees a fair but reasonable wage, and then pay dearly to acquire and retain solid performers once they prove themselves?

Concluding Thoughts

Returning to the question of value to clients: is it reasonable for a client to pay $175 an hour for a trainee fresh out of law school? For the vast majority of associates who are not also specialized subject matter experts, the likely answer seems to be no ' not even if the associate promises to baby-sit for the client on New Year's Eve.

And if clients are being overcharged to make higher associate salaries feasible, it seems equally likely that most of these associates are being overpaid. Overpaying people isn't doing them a favor: briefly, it inclines them to feel like phonies, be unhappy and drink alcohol to excess.

If a new round of major salary hikes for associates seems unjustifiable, what is the real logic behind firms jumping on this bandwagon? A contributing factor could be a dynamic commonly seen in corporations: managers pressing for raises for their subordinates in part so as to justify compensation increases for themselves. It's not just associate billing rates that clients complain about.

But perhaps a simpler explanation for firms rushing to join this trend is that “bandwagon” is more than the name of a psychological-sociological phenomenon. It's also one modern name for the argumentum ad populum, a classical logical fallacy.

As Jim Cotterman points out in Compensation Plans for Law Firms 4th edition, the whole issue of associate profitability gained prominence in recent years because the economics of associate compensation changed.

In former times, associates in their early training stages got very low salaries. They also had very low hourly billing rates. Clients understood that they weren't usually getting enormous value from an hour of work by a new trainee, but they were getting more or less what they paid for.

After an extended round of associate salary and rate raises a few years back, however, increasingly budget-conscious and assertive clients became reluctant to pay for an associate to sit in on meetings as an observer, or to pay for a slow trainee to accomplish what an experienced lawyer could do quickly at a lower total cost.

As described in the following article abridgements from A&FP sibling publications, associate salaries and rates are headed up once again, pressures from cost-conscious clients notwithstanding. I have a possibly discomfiting view to offer on this, but first let's take a look at the bandwagon effect now in progress in some major U.S. legal markets.

Atlanta

[From a January 12 article by Meredith Hobbs in Fulton County Daily Report.]

Alston & Bird's move to hike associate pay in its Atlanta office is reshaping the local salary market. In the last week, Sutherland Asbill & Brennan, Greenberg Traurig and Smith, Gambrell & Russell also sweetened associates' salaries, matching Alston's across-the-board increases that now start first-years at $115,000.

That followed immediate across-the-board increases at King & Spalding, Troutman Sanders and Morris, Manning & Martin after Alston's announcement.

Other big firms, including Kilpatrick Stockton and Powell Goldstein, say they will raise associate pay but are still ironing out the details, while one boutique, Bondurant Mixson & Elmore, will match whatever the top Atlanta rate is after the dust has settled.

Alston hiked associate pay by at least $15,000 per class ' the first significant rise in associate pay in the local market since 2000, when big firms increased first-year pay from $75,000 to $100,000.

Morris, Manning & Martin ' along with King & Spalding and Troutman Sanders ' raised pay for its own associates within two days of Alston's Dec. 20 announcement.

“We felt it was crucial to be at the market or, in our case, a little ahead of the market,” said Morris Manning's leader, Robert E. Saudek, who said his firm already paid senior associates more than their counterparts at Alston and King & Spalding. Morris Manning is raising pay by $15,000 for first-, second- and third-year associates and $20,000 for the subsequent classes, he said.

Several of the city's other large firms now have followed suit. At Smith, Gambrell & Russell, managing partner Stephen M. Forte announced a pay increase to his firm's associates Dec. 5. “We're starting our first-years at $115,000. It seems to be where the market has moved,” Forte said, adding that associates across the board would get raises. That is the same amount Alston, King & Spalding, Troutman and Morris Manning are paying first-year associates.

Sutherland Asbill raised salaries for all of its Atlanta associates Jan. 6, meeting the new minimum of $115,000 for rookie associates. The firm also raised pay for third-year associates and above in its Washington and New York offices, said managing partner Mark D. Wasserman.

In Washington, Sutherland upped third-year pay by $5,000. It gave heftier raises to more senior classes, so sixth-year pay went up by $20,000. In New York, the firm upped associate pay, starting with third-years, by $5,000 across the board, which Wasserman said gets salaries up to the going rate for the New York market. Sutherland's third-year associates in New York now make $155,000.

Miami-based Greenberg Traurig has also raised associate pay in its Atlanta office, said local co-leader Allen D. Altman. “Our firm is going to be participating in the salary bump-up for years one to seven, similar to Alston & Bird and King & Spalding,” he said, adding that the firm made the decision within the last week.

Greenberg increased compensation across the board for each class of associates up to the seventh year, commensurate with the raises at Alston and King & Spalding, Altman said, with rookies now starting at $115,000. After the seventh year, the firm looks at associate pay on a case-by-case basis, he said.

Smith Gambrell's Forte pointed out that the Atlanta legal market does not operate in a vacuum. Pay increases in large cities such as New York, Los Angeles and Chicago have a ripple effect on Atlanta, putting pressure on associate pay here, he said.

Los Angeles & San Francisco

[From a January 17 article by Petra Pasternak in The Recorder.]

Days after two big L.A. firms hiked base salaries for associates, San Francisco's Keker & Van Nest announced it was matching the raise. Keker partner Christopher Kearney said last week that the 50-lawyer litigation firm would increase the base pay for first-year associates to $135,000 to compete with three L.A. firms that announced hikes in the past month.

“To get the top people, we need to pay at market,” Kearney said, adding that the firm competes for talent against San Francisco firms and the Northern California offices of L.A.-based firms. Keker also matched increases in the salaries of other classes. Fourth-year salaries are up $5,000, to $170,000, and seventh-years' are now at $210,000.

L.A. firms O'Melveny & Myers and Paul, Hastings, Janofsky & Walker said last week that they'd bump first-year salaries to $135,000 to match Gibson, Dunn & Crutcher's December increase.

In September, smaller Los Angeles firms Irell & Manella, Quinn Emanuel Urquhart Oliver & Hedges and Munger, Tolles & Olson lifted salaries in a market that had been largely frozen since the dot-com days. Given the growing competition for young guns, most local lawyers are closely watching salary developments.

Nossaman Guthner Knox & Elliott just raised first-year associate salaries to the national average of $125,000 effective Jan. 1. Managing Partner Scott DeVries said that's a “good place” and the firm intends to stay there. “We think this is the consistent prevailing rate in the community,” he said. “Of course, if there are material moves throughout the San Francisco marketplace, it's something that we'd need to assess.”

More on California Firms

[From a January 18 article by Marie-Anne Hogarth in The Recorder.]

Wilson Sonsini Goodrich & Rosati will match the increases in base salaries for associates announced by some big Los Angeles-based firms in the past few weeks.

Effective Feb. 1, first- and second-year associates pay will jump $10,000, to $135,000 and $145,000 respectively. Third through ninth-year associates will all get a $5,000 raise. The move places compensation for fourth-year associates at $170,000 and seventh-years at $210,000.

Wilson CEO John Roos said, “Obviously we want to attract the best people to the firm,” adding that Wilson also made the decision based on its performance in 2005 and its position in the market.

According to The Recorder's Associate Salary survey, Wilson's bonuses, as awarded in January 2005 for first-years, fall within a range of $1,000 to $12,000. Fourth-years earn up to $21,000 in bonuses, and seventh-years up to $35,000. Additionally, Wilson awards quarterly productivity bonuses to associates.

Cooley's first-year associates currently earn $125,000, fourth-years earn $165,000, and seventh-years earn $200,000. … Fenwick pays first-year associates $125,000, Davidson said. …

New York-based Skadden, Arps, Slate, Meagher & Flom has been paying $140,000 to first-years nationwide, including in California.

Latham & Watkins remains the only large L.A.-based firm that pays first-year associates $125,000.

A Question of Value

From the vantage point of other articles A&FP has featured last month and this month, the key question about higher associate compensation would seem to be this: Given that only so much cost can be recovered through higher associate billing rates, how can law firms afford such high associate compensation and still make a profit?

My own question, however, pertains to client value: If clients were already concerned that associate billing was excessive, how do firms propose to justify even higher associate rates?

Surprisingly, soaring big-city housing costs and similar factors don't seem to be cited by the interviewees in these articles. The rationale instead is this: Talent is in short supply, and competition for it is fierce, so any salary hike by a leading firm impels other firms in the same legal market to match it. That reasoning seems shaky, though, for several reasons.

Questionable shortage of talent. Given that law firms have such a limited ability to identify future star performers, how well founded is this fierce talent-recruitment competition? If there were an overall numerical shortage of available applicants, the supply-and-demand argument would be comprehensible. After all, teen-agers in Manhattan commonly charged $100/hr for babysitting services this past New Year's Eve ' a combined illustration of intangible value, supply-and-demand, time utility, price gouging, and lay-down customers.

But there are plenty of law graduates each year. Are the sought-after markers of future stardom trustworthy enough to justify a desperate bet-the-firm recruiting posture in making salary offers to associates?

Contrast the situation of law firms with that of professional sports teams. A college sport and its professional equivalent have their differences, but it's the same game. When pro teams bid up the starting rate for a trophy-winning college athlete, there's certainly some risk of disappointment, but they can already see the college star throwing an accurate long pass or sinking a basket from mid-court. Law school and law practice are so different, however, that hiring the most promising law student is an act of faith, not to say a crap shoot. [Managing Editor's Note: It's actually remarkable to think of how few Heisman Trophy winners as the best college football player have productive, much less superstar, professional careers. But at least professional player personnel directors have past performance evidence to validate a high draft pick and resulting large signing bonus and salary.]

Beyond the failure to predict reliably which starting associates will do well, law firms can't even assess accurately how well new associates are doing after the hire. Indeed, many firms use associate salary tiers for the first few years specifically to avoid having to do performance assessments.

Indiscriminate pay boost. In any case, these starting salary boosts don't seem to be just for stars; they're being described in commodity terms!

Roving talent. Finally, even though acquisition of talent is a necessity, that acquisition is not permanent. Like their seniors, associates feel freer to switch firms than in years past. This means a firm could let other firms pay exorbitant salaries to associate trainees, and then later lure away the best of those associates by offering them a terrific salary or a fast track to partnership. (Firms claim they prefer to train associates from scratch in their own way of lawyering, but in practice the choice seems to be between having an associate that you unsystematically mentor vs. one that somebody else unsystematically mentors.)

In short, doesn't it make more sense to pay associate trainees a fair but reasonable wage, and then pay dearly to acquire and retain solid performers once they prove themselves?

Concluding Thoughts

Returning to the question of value to clients: is it reasonable for a client to pay $175 an hour for a trainee fresh out of law school? For the vast majority of associates who are not also specialized subject matter experts, the likely answer seems to be no ' not even if the associate promises to baby-sit for the client on New Year's Eve.

And if clients are being overcharged to make higher associate salaries feasible, it seems equally likely that most of these associates are being overpaid. Overpaying people isn't doing them a favor: briefly, it inclines them to feel like phonies, be unhappy and drink alcohol to excess.

If a new round of major salary hikes for associates seems unjustifiable, what is the real logic behind firms jumping on this bandwagon? A contributing factor could be a dynamic commonly seen in corporations: managers pressing for raises for their subordinates in part so as to justify compensation increases for themselves. It's not just associate billing rates that clients complain about.

But perhaps a simpler explanation for firms rushing to join this trend is that “bandwagon” is more than the name of a psychological-sociological phenomenon. It's also one modern name for the argumentum ad populum, a classical logical fallacy.