Different Views on Associate Salary Increases from ALM Bloggers
Two of Law.com's affiliate bloggers, Larry Bodine and Bruce MacEwen, offer two different perspectives on the big firm associate rate hikes announced a couple of weeks ago. In Bodine's view, megafirms are overpaying for first-year associates, which will eventually open competitive opportunities for midsized, less leveraged firms. But for MacEwen, asking whether $160,000 is too high a salary is the wrong question; the ratio of associate salaries to PPP (profits per partner) also matters. Here's more on each approach.
Bodine writes that the new pay rates are leading to bloated expenses for firms. He calculates that total cost of new associates at the higher rates is "at least $2000 per day." And not surprisingly, Bodine describes that:
The giant law firms are boosting their rates to pay these breathtaking salaries. A client of mine who is the President of a $650 million company, said his +1500-lawyer Chicago law firm was already charging his company $500 per hour.
When I saw the announcement about the raises, I said ‘Oh God,” Michael Roster, executive vice president of World Savings, a subsidiary of Wachovia Corp., told the ABA Journal. With the salary raise, Roster said law firms will put more pressure on associates to bill, and partners may have more incentive to charge clients for associate learning time.
For Bodine, higher rates "create huge opportunity for mid-sized and boutique firms," which offer better rates and specialized expertise. As a result, Bodine predicts that a larger percentage of corporate dollars spent on legal fees will go to midsize and specialty firms in 2007.
While MacEwen acknowledges that firms must consider salaries (and rates) that clients will stand for, that's not the focus of his post. Rather, MacEwen writes that in truth, associate salaries aren't all that high when compared to the growth in PPP at the Am Law 100 firms. Citing a study by professor Bill Henderson, MacEwen notes:
* At $160,000, first-year salaries are actually at the lowest relative to PPP in the last 10 years: Just 11.7%
* Ten years ago in 1996, with first years at $70,000, the proportion was 14.3%
* And it reached its high during that decade, of 15.4%, in 2001.
According to professor Henderson, the ratios are disproportionate, not because associates are being short-changed but because "the premium placed on revenue-generating, book-of-business-toting, major partners has never been higher." Henderson also adds that in the new large law firm model, the next generation of lawyers "are largely going to begin and end their careers as employees," with the rainmakers continuing to carry the ball. The higher salaries, then, seem to be the least that firms can afford to pay to make sure there are enough worker bees to handle billable work.
MacEwen's post is interesting, but it leaves me wondering how long this large-firm business model can survive. Already, as he points out, associates are leaving firms in droves; higher salaries seem to matter little in that regard. And how long will even high-paid lawyers tolerate employee status? At the same time, as Bodine points out, there's a limit to how high firms can go with salary, before clients start to depart. And that's where Bodine and MacEwen seem to be most in agreement: that the ability of large law firms to continue to retain their existing business model is very much in doubt.
Posted by Carolyn Elefant on February 7, 2007 at 08:23 PM | Permalink
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