LeBron has established his worth by tangible metrics (and some intangibles, too). He cashed in on a free agent bonanza fueled by the NBA’s economic model that supports his regal compensation. But such is not the case with the associate and senior partner hikes at a handful of law firms. The corporate legal market is one where client dissatisfaction is high, demand for law firm services is flat, more work is being done in-house or by service providers operating from lower-cost structures, belt synching is rampant, and the new mantra is “do more with less.”
Why, then, would Cravath and a handful of other firms that matched its bump draw attention to themselves in this way when the optics are so bad–especially with clients?
Let’s start with the Cravath salary hike. Cravath grabbed headlines when it announced the first starting associate raise since 2007. It did not take long for a handful of high-profile firms to match the $180K prize nor for pundits to weigh in with explanations. Bill Henderson, a professor (and friend) who focuses on the legal industry, commented that Cravath’s bump was the firm’s way of ensuring its historically successful efforts to attract the “best and brightest” at a time when competition for premium graduates has intensified due to declining LSAT scores and law school enrollment (and sky-high law school tuition). Translation: the premium legal talent pipeline is thinning.
Five years ago the The Wall Street Journal reported that some lawyers were charging $1,000 an hour. Then this Spring, The Guardian disclosed that some Magic Circle partners billed at $1,500 an hour, and I questioned whether that could be good value. And now, a short time later, Law 360 reported the top rate on this side of the pond has reached $2,000 an hour. It’s an odd time to have a rate hike war, isn’t it? And why, when senior partners at elite firms are already pulling in upwards of $4million a year do they need to draw additional attention to their compensation by upping rates (2,000 hours@$2,000/hr.=$4M– and that does not take into account “partner tribute)?
Some other explanations for the rate hike are: internal leverage within the firm (more profitable and entitled to bigger slice of partnership profits); enhanced attractiveness as a lateral; publicity; and creating the impression that “I’m so good that market forces affecting other lawyers don’t apply to me.” One more time with feeling: hubris or chutzpah–maybe both?
Lawyers are free to set billing rates and associate pay as they deem fit. But when those numbers are so out-of-sync with marketplace trends, it’s fair to ask “why?” First year salaries of $180K and $2K billing rates–significant bumps at a time of belt synching–bespeak indifference- even disdain- for consumer demand to rein in legal cost. And whatever the rationale for the lawyers and firms charging these numbers, it will no doubt amp up consumer ire. And it will likely turbocharge efforts to mine legal expertise from other sources, operating in different structures, and providing greater value. That’s the bigger story behind these numbers.