Associate Costs from the Viewpoint of In-House Counsel

In late January, Simpson Thacher & Bartlett LLP announced that it was hiking its first-year associate pay to $160,000. Since then, the legal press has noted that an increasing number of firms in every major legal market plan to follow suit.

I've heard disgusted buzzing about this among corporate counsel at private luncheon meetings. But that's all. There's been no hint of the revolution that I was sure would erupt. In-house counsel of the world: What are you waiting for? Who's managing your company's legal spending: you, or the firms?

Let's do the math. Be conservative and say that an average sophisticated law firm pays an extra one-third of an employee's compensation in benefits. So that's the newly announced first-year salary level of $160,000, plus another $50,000 or so, taking us to $210,000. Then there's overhead, including a portion of the law firm's high-market rent; top-notch administrative support; computer, library, and other office technologies; and that fancy art-filled lobby (so crucial to not only impressing clients, but to attracting those top first-year associates). So let's add another $100,000 for overhead, round it off, and say that now our highly recruited first-year associate costs the firm $300,000 a year.

That doesn't take into account the cost of the wining/dining/cocktail-cruising summer associate program and the cost of the firm's high-power recruitment team that brought the first-years into the fold. And it doesn't factor in the cost of attrition: For every 10 of those first-years, less than half (usually more like a quarter or a third) will make it to partnership and profitability before they're either pushed out or run screaming from the building. So let's say ' again, conservatively ' that the $300,000 cost of a fully loaded first-year associate, when combined with the very real costs of attrition and recruiting, brings us to a nice 'blended' cost of about $400,000 a year.

Add to that the fact that most big firms operate on a lockstep salary system for associates, so a raise for the first-rung associates necessitates a corresponding raise for every other successive class. So your first-years aren't the only ones getting more expensive: The entire associate portfolio just went up in cost.

Who Pays?

Who's paying for this? Do you think that when the decision is made to up first-year salaries that the partnership votes to take less money to pay for it? Or do you think that the associates will be expected to 'earn their keep'? (The latter is a nicer way of saying that clients will be billed for the overworked first-year associates' time and efforts.)

If you assume that every one of those associates will bill 2000 hours that can actually be invoiced to a client (as opposed to a certain amount of time ' probably 500 hours in the first year out of 2500 ' that will be counted somewhere but written off as uncollectible for whatever reason: incompetence, client objections, learning curve, pro bono, firm events, you name it), that means that their 2000 hours will have to be billed at an average of $200 an hour in order to reach the break-even point. And most corporate counsel with large-firm legal costs will tell you that they are being charged much more than that per hour for the privilege of these associates' time.

Is this out of touch with reality? You bet. I'm completely unpersuaded by apologists who suggest that entry-level associate salaries are hardly keeping up with partners' slice of take-home pay. The fact that the associates make less per year compared to their partners than associates 20 years ago did is yet another indicator of how obscene partners' fees and profits are in the law firm business. Sure, outside counsel are entitled to make as much money as they can, but let's not 'justify' these salary increases by suggesting that they're necessary to adequately compensate associates.

For comparative purposes, take a look at those we hope will be the cream of the profession: the federal judiciary. They must be attracted to engage in public service at the pinnacle of their careers, but they will be paid less than first-years if you factor in even a small bonus for signing or end-of-the-year performance evaluation. Many law firm newbies will make more in their first year than an associate justice of the U.S. Supreme Court. Our underpaid judiciary is not the fault of large law firm associates, but aren't their years of experience worth at least as much in terms of compensation value as the promise of a green law school graduate?

Companies can hire an incredibly smart and experienced associate or partner in the next town over from New York, or Washington, DC, or Los Angeles, or Chicago who bills $250 an hour, and who can do the same work in half the time of that $200 associate or his or her $800 partner. And the Internet makes lawyers from around the world as accessible as those next door. Don't forget about the non-law firm consultants, who can do most of the work of associates in any number of disciplines ' document review or discovery work, contracts, research and analysis, investigations ' at a fraction of the cost. Why do we continue to give big firms this kind of work at their inflated rates when it's clear that their pricing is in no way related to the value the associates provide? These rate hikes are about attracting top graduates, not about increased or better client service.

Draw the Line

So where will in-house counsel draw the line on new associate costs? Why don't corporate clients simply say, 'We're not paying for this anymore'? In-house legal executives need to stand up and exercise their considerable influence. Demand to know ' in detail ' why prestigious firms believe their inexperienced associates provide more value than a successful partner in a less expensive firm or an expert legal service vendor/consultant. Tell them that you're happy to pay high rates for high quality and experience, but you'll be the judge of the value provided. And if they answer that they had no choice but to follow the market in order to attract the same 50 graduates from the same 25 top-ten schools, then label them the sheep that they are, and vote with your feet.

Great legal service is expensive, but someone needs to remind the managing partners of the prestigious firms that it should never cost more than it's worth. Associates who receive these pay hikes (but from whose hides these costs will be recouped) and your clients all deserve better.

This article originally appeared in Corporate Counsel magazine, an affiliate of A&FP.

Susan Hackett is the general counsel of the Association of Corporate Counsel.

In late January, Simpson Thacher & Bartlett LLP announced that it was hiking its first-year associate pay to $160,000. Since then, the legal press has noted that an increasing number of firms in every major legal market plan to follow suit.

I've heard disgusted buzzing about this among corporate counsel at private luncheon meetings. But that's all. There's been no hint of the revolution that I was sure would erupt. In-house counsel of the world: What are you waiting for? Who's managing your company's legal spending: you, or the firms?

Let's do the math. Be conservative and say that an average sophisticated law firm pays an extra one-third of an employee's compensation in benefits. So that's the newly announced first-year salary level of $160,000, plus another $50,000 or so, taking us to $210,000. Then there's overhead, including a portion of the law firm's high-market rent; top-notch administrative support; computer, library, and other office technologies; and that fancy art-filled lobby (so crucial to not only impressing clients, but to attracting those top first-year associates). So let's add another $100,000 for overhead, round it off, and say that now our highly recruited first-year associate costs the firm $300,000 a year.

That doesn't take into account the cost of the wining/dining/cocktail-cruising summer associate program and the cost of the firm's high-power recruitment team that brought the first-years into the fold. And it doesn't factor in the cost of attrition: For every 10 of those first-years, less than half (usually more like a quarter or a third) will make it to partnership and profitability before they're either pushed out or run screaming from the building. So let's say ' again, conservatively ' that the $300,000 cost of a fully loaded first-year associate, when combined with the very real costs of attrition and recruiting, brings us to a nice 'blended' cost of about $400,000 a year.

Add to that the fact that most big firms operate on a lockstep salary system for associates, so a raise for the first-rung associates necessitates a corresponding raise for every other successive class. So your first-years aren't the only ones getting more expensive: The entire associate portfolio just went up in cost.

Who Pays?

Who's paying for this? Do you think that when the decision is made to up first-year salaries that the partnership votes to take less money to pay for it? Or do you think that the associates will be expected to 'earn their keep'? (The latter is a nicer way of saying that clients will be billed for the overworked first-year associates' time and efforts.)

If you assume that every one of those associates will bill 2000 hours that can actually be invoiced to a client (as opposed to a certain amount of time ' probably 500 hours in the first year out of 2500 ' that will be counted somewhere but written off as uncollectible for whatever reason: incompetence, client objections, learning curve, pro bono, firm events, you name it), that means that their 2000 hours will have to be billed at an average of $200 an hour in order to reach the break-even point. And most corporate counsel with large-firm legal costs will tell you that they are being charged much more than that per hour for the privilege of these associates' time.

Is this out of touch with reality? You bet. I'm completely unpersuaded by apologists who suggest that entry-level associate salaries are hardly keeping up with partners' slice of take-home pay. The fact that the associates make less per year compared to their partners than associates 20 years ago did is yet another indicator of how obscene partners' fees and profits are in the law firm business. Sure, outside counsel are entitled to make as much money as they can, but let's not 'justify' these salary increases by suggesting that they're necessary to adequately compensate associates.

For comparative purposes, take a look at those we hope will be the cream of the profession: the federal judiciary. They must be attracted to engage in public service at the pinnacle of their careers, but they will be paid less than first-years if you factor in even a small bonus for signing or end-of-the-year performance evaluation. Many law firm newbies will make more in their first year than an associate justice of the U.S. Supreme Court. Our underpaid judiciary is not the fault of large law firm associates, but aren't their years of experience worth at least as much in terms of compensation value as the promise of a green law school graduate?

Companies can hire an incredibly smart and experienced associate or partner in the next town over from New York, or Washington, DC, or Los Angeles, or Chicago who bills $250 an hour, and who can do the same work in half the time of that $200 associate or his or her $800 partner. And the Internet makes lawyers from around the world as accessible as those next door. Don't forget about the non-law firm consultants, who can do most of the work of associates in any number of disciplines ' document review or discovery work, contracts, research and analysis, investigations ' at a fraction of the cost. Why do we continue to give big firms this kind of work at their inflated rates when it's clear that their pricing is in no way related to the value the associates provide? These rate hikes are about attracting top graduates, not about increased or better client service.

Draw the Line

So where will in-house counsel draw the line on new associate costs? Why don't corporate clients simply say, 'We're not paying for this anymore'? In-house legal executives need to stand up and exercise their considerable influence. Demand to know ' in detail ' why prestigious firms believe their inexperienced associates provide more value than a successful partner in a less expensive firm or an expert legal service vendor/consultant. Tell them that you're happy to pay high rates for high quality and experience, but you'll be the judge of the value provided. And if they answer that they had no choice but to follow the market in order to attract the same 50 graduates from the same 25 top-ten schools, then label them the sheep that they are, and vote with your feet.

Great legal service is expensive, but someone needs to remind the managing partners of the prestigious firms that it should never cost more than it's worth. Associates who receive these pay hikes (but from whose hides these costs will be recouped) and your clients all deserve better.

This article originally appeared in Corporate Counsel magazine, an affiliate of A&FP.

Susan Hackett is the general counsel of the Association of Corporate Counsel.