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The Matching Game: Why
Firms Follow Firms on Salaries

By Ashby Jones

 

March 22, 2006
Wall Street Journal

The current salary battle roiling big law firms began the way such things usually do in the legal profession: with a calculated disruption of the status quo. Los Angeles-based Irell & Manella last fall said it was raising salaries for its first-year associate attorneys by $5,000 -- to $135,000.

When news of the pay raises broke, you could almost hear the collective groan of law-firm managing partners across the country. Why? Because they too would have to raise salaries to "stay competitive." And they did.

After a slight pause -- perhaps to see if Irell and another early hiker, L.A.-based Quinn Emanuel Urquhart Oliver & Hedges, really meant it? -- other firms announced that they too were bringing their first-year salaries up to $135,000. The biggest New York firms in February leapfrogged the others and bumped first-year pay to $145,000. Since then, the walls have crashed in, with firms headquartered in London, Washington, Philadelphia, San Francisco, Chicago, Houston and elsewhere all adjusting upward, the lion's share to $135,000. Not to be outmatched, Quinn Emanuel has since bumped its first-year pay, again, to $145,000.

Pay increases aren't cheap. They typically ripple up through the associate ranks, so within the first year they can cost in the millions -- money that comes straight from the partners' pockets. (The last major pay wave came in early 2000.) On the associate side, when you are working 2,200 hours a year, five grand pre-tax doesn't seem like it should be a job-choice clincher.

So what is it with big law firms? Is what they pay their entry-level lawyers really that important?

The answer is yes, strangely. In the world of big law firms, what you pay your first-year associates is that important.

[Icon] PAY PALS
 
A selection of firms that have announced first-year salary increases in the past six months, according to press reports.
Gibson Dunn & Crutcher
O'Melveny & Myers
Sullivan & Cromwell
Cravath, Swaine & Moore
Dechert
Jenner & Block
Mayer, Brown, Rowe & Maw
Latham & Watkins
Weil, Gotshal & Manges
Simpson Thacher & Bartlett
Morgan, Lewis & Bockius
Davis Polk & Wardwell
Vinson & Elkins
Baker Botts
Orrick, Herrington & Sutcliffe

The reason boils down to a supply-and-demand issue. First, the demand side: Over the past twenty years, the biggest law firms have gotten even bigger, thanks to a boom in work from international mergers-and-acquisitions to global capital markets to intellectual-property litigation. They've eaten up stagnating smaller general-practice firms, bought up elite intellectual-property boutiques and pushed hard into foreign territories. One of the more stunning examples happened over the course of several months in the fall of 2004, when three firms -- two based in the U.S. and one based in London -- merged to form DLA Piper Rudnick Gray Cary -- which now boasts more than 3,000 lawyers worldwide and offices in Beijing, Tokyo, and Tbilisi, Georgia, among others.

The biggest firms have also gotten a whole lot richer. According to surveys conducted by the American Lawyer magazine, only two firms were $100 million businesses in 1986, while in 2005, 184 firms topped the $100 million mark in gross revenues, with five pulling down more than $1 billion. The biggest of these firms represent the nation's biggest companies, charge huge fees, and can take on just about any legal matter. They pay top dollar and, generally speaking, work their associates hard.

The mega-firms need to hire associates at a much greater rate: The average incoming class size at the largest law firms has gone up significantly in the past 10 years, says Peter Zeughauser, the head of the Zeughauser Group, a Newport Beach, Calif., consultancy to law firms. For example, at Los Angeles-based Latham & Watkins, the incoming class of new associates world-wide has grown from 104 in 1996 to 273 last year, according to the firm.

Selecting these first-years is where the demand part of the equation comes in. Sizing up law students for their potential as great lawyers, or rainmakers, is a nearly impossible thing to do. Fancy schools, good grades and law-review smarts don't necessarily translate into workplace success. But these markers are about the only differentiators law firms have. Because it's so hard to judge students on the merits, the focus is on prestige. Says Mr. Zeughauser: "Law firms jockeying for position in the marketplace need that cachet to keep their brand strong."

Seeking prestige in their hires, the big firms turn to the top students at the most prestigious law schools to fill their ranks. And that pool has stayed mostly flat, experts say. "Demand is vastly outstripping supply for talented young lawyers," says Blane Prescott, a consultant to law firms with Hildebrandt International. "And that's a big reason behind why firms have to match salaries almost instantaneously."

The associates are the supply side of the equation. Just as law firms make decisions based on limited criteria, so do associates.

Their decision of where to work is not (necessarily) about greed. Rather, it's about what they're going to get out of the experience. Increasingly the answer isn't partnerships. Thanks in part to the growth of these firms, the road to partnership is a lot more arduous than it used to be. When I graduated from law school in 1996, a seven-year associate apprenticeship was customary. Now, at the biggest firms, partnership decisions are often put off until the 10th or 11th years. 

These days what's foremost in law students' minds is not making partner but making money during those early years (after all, a private legal education can saddle a student with well over $100,000 in debt) as well as ensuring they'll be able to get a good job elsewhere when their law firm stint is up. "Money, training, and development are what most students are looking for," says Ellen Wayne, dean of career services at Columbia Law School.

Training and development are much squishier selling points than cash. William Urquhart, a name partner at Quinn Emanuel, one of the firms that started the most recent pay frenzy, says, it's difficult for law students "to look behind [the literature law firms distribute] and find out what a law firm is really all about. But one thing they can look at and compare is a salary."

As august a profession as big law may be at its best, when it comes to hiring, it's capitalism at work. And as long as the nation's biggest law firms keep growing bigger and richer, their associates can rest assured that yet another pay hike probably isn't too far away.