The Perpetual Salary Wars

 

Harrison Barnes

Back when I was younger and in college I remember being amazed that salaries at some of the largest New York law firms were as much as $50,000 a year.  This was not that long ago.  Since I wanted to be a lawyer from a fairly early age, that sounded like a pretty good thing.  By the time I had gotten out of college the salaries of the same firms had risen to $60,000 a year and by the time I got out of law school they were even higher. I remember when I was applying to law school thinking that a lot of people who were applying to law school also were applying because of the high potential salaries they could earn if they joined large law firms.

Every few years there is a "salary war" of sorts as law firms raise the salaries of their incoming classes.  In response to this, a lot of stuff ends up happening.  Since I am intimately involved in the legal industry I believe that I have a particular degree of insight into what happens.  In fact, I have been an attorney in a large law firm, have placed hundreds of lawyers, have hired numerous law firms to work for me and have had numerous people work inside my various companies as attorneys.  I want to offer some insights into what happens when a salary war starts.  I have seen this pattern repeat itself over and over again over the past several years so I believe it is worthwhile to examine the stages.

I want to note at the outset that the results of a salary war are something with deep sociopolitical significance.  These salary wars throw off results and meaning for years after they start.  These are, in fact, one of the most dangerous times to be an associate in a large law firm.  Markets operate in an efficient manner and are always seeking a state of balance.  Any state of disequilibrium can never last for an extended period of time

1. Law Firms Start Getting More and More Work.

The first stage that generally precedes any salary increase is law firms start getting more and more work.  Law firms will generally start getting more and more work due to an up tick in corporate work.  The corporate work itself that law firms due for their clients is often quite profitable for the clients and a lot of gratitude is set up whereby the clients appreciate the work that the corporate attorneys have done.  The extra corporate work generally comes about in a business environment that is growing and creating opportunity for businesses of all sizes.  Corporations start believing that they need more assistance with the work that they have and start giving law firms more and more work.

When law firm start giving more and more work to outside counsel this is generally a  sign of market inefficiencies at work.  Since law firms charge more than in house counsel, corporations will generally seek to do work themselves (with salaried lawyers).  The filtering of great reams of corporate work to outside lawyers and law firms is a sign of market inefficiency.

The increase in corporate work is a sign that work will likely increase among many practice areas.  For example, practices such as trademark prosecution and patent prosecution (signs of new company formation) will also generally increase with corporate work.  In addition, many types of work will increase as well.  It is not uncommon for a surge in corporate work to throw off a surge of litigation and other types of work to other departments in a law firm.

The reason that corporate work will often generate this sort of work at these times is due to the fact that corporate attorneys will start having increasingly close (and often new) relationships with clients and these clients will often be able to give them more and more work.  This is due to the fact that there is a healthy corporate environment and corporations will not be watching their expenses and so forth as closely.  When this starts occurring the reputation of law firms will also rise with the successes of their clients.

As law firms start getting more and more work they begin finding themselves in a situation where the partners of the firm are getting more requests for work than they have the resources to handle.  The law firms will give as much work as the associates in the firm can handle.  The law firms will also hold the prospect of partner (as they always do) as a tool to get more and more hours out of each and every single associate and thereby increase the overall profitability of the law firms.  In addition, the law firms will begin hiring aggressively at the lateral and other levels in an attempt to fill their needs.

Inevitably, the law firms will discover that they are not getting enough of the sorts of candidates they want.  What then ends up happening at most law firms is in a desire to get work done (and make more money) the law firms start lowering their hiring standards.  This should be a huge warning sign and it is something that can never last.  You need to remember that law firms are like organisms and will always move towards a state of equilibrium.

I remember during the hiring boom of 1999 seeing major first tier law firms hiring laterals and others who were not even at the very top of their class at fourth tier law schools.  This was a sign that something was wrong.  (More on these sorts of hires later.)

What then ends up happening is the law firms reach a stage where they simply do not want to lower their standards anymore and are not getting enough good people.  Law firms realize that they do not have enough people to do the existing work that they are getting and face enormous pressure to bring in more good people.  Turning away clients is not easy for most law firms.  They do not want to lose business and partners usually begin making "impassioned" please to their superiors and stating that they need to be in a firm where there are more resources to do work (remember partners get paid in large part based on the amount of business they bring in).

At some point some firms are at a point where in the race for lateral and other talent they feel they are losing too many attorneys to other firms.  Once this occurs a "boiling point" is reached and the decision to raise salaries begins to be contemplated.

I remember when Gunderson Detmer was exploding with attorneys in 1998 and 1999 and someone I knew received a lateral offer from there (Gunderson is also the firm that started the salary wars in 2000).  The firm sent her a giant gift basket and wines and was calling her on a daily basis telling her they really wanted her to come and so forth-this is not normal for law firms.  I remember a partner at Wilson Sonsini got down on one knee and begged her to come to the firm.  At the time I remember thinking to myself that this sort of behavior was highly and extremely unusual and would not last.

Finally, after a certain tension point is reached, one firm raises salaries for its associates.  Not to be outdone, other firms rapidly follow believing that this too will be a major factor in how they are viewed by potential hires.

Keep in mind it takes law firms a lot of time and resources to hire laterally and hire associates in the first place.  Firms are indeed competing for talent.

2. Salaries Are Raised: The Honeymoon Phase

Firms raise salaries at a point when they are generally "flush" with cash.  These rising salaries are something that at the time are not really all that threatening to the largest firms because there is an atmosphere of optimism and a great deal of work coming through the door.  Salary increases are justified within the firm as something necessary to keep growing with the new business flowing in.  Salary increases are also justified as something that all large law firms and competitive law firms have to do and is seen as a source of pride within the law firms.

It is important to note that the salaries are not increased from a source of rationality.  They are increased as "gut reactions" and as a way of keeping up with the Joneses.  The salaries are also increased in an atmosphere of believing that everything will always be good and that business is bountiful.

On a macro level, it is important to note that there are some deeper economic trends which govern times when salaries are increased like this.  Generally in most societies the increase in economic and corporate wealth increases due to advances in productivity and means of production.  For example, farming equipment and the use of animals at one time enabled the development of societies and cities.  This was a major economic change.  Other advances such as the automobile and the assembly line means of production brought about great technological change.  In the more modern day, the Internet and telecommunications environment brought about a great influx of wealth into IPOs and other sources of money in the late 1990s.

It was precisely this influx of money into IPOs and the optimism this created that led the salary wars that occurred in 2000. The corresponding exit of money from these markets is also what caused the crash and dearth of legal work.

What ends up happening when new technologies begin is that there is a rush of capital into these new technologies.  However, most of this capital is ill placed and simply chases after the wrong thing.  None of this is to say that the technologies and ideas that this money was chasing are bad-it is just that they money was going at the wrong people.  Following such a crash, what generally ends up happening is the technology is still around but money begins being directed at expanding the technology and broadly adapting the technology to the entire market.  The spread of the Internet and cell phones everywhere between 2006 and 2007-the mass adoption of these-is an example.  As this occurred by 2006 the stock market had again reached historic highs and more and more opportunity started being created throughout the market.  The salary increases in law firms of 2007 are something anyone could have predicted with an understanding of basic economics.

What happens, then, when the market begins to become completely saturated with a new technology that gave rise to the mass economic changes in the first place?  The answer to this should be pretty obvious.

As the salaries increase at these firms some other not so predictable results occur.  While middle tier and smaller firms may have been able to moderately (or completely) compete with the salaries that the largest law firms were paying prior to the salary increases, these same law firms are generally not built for the same sort of "competition" the largest law firms are and simply do not match these salary increases.  (As a side note: The ones that do match these salary increases can generally not afford to do so and often within a year or two merge with larger law firms to remain competitive!  In addition, these smaller law firms often simply go out of business because they feel they cannot attract attorneys to work for them at the salaries they  pay the partners and scatter to other firms in search of greener (i.e., more money) pastures and associates to do their work.)

Consequently, the largest law firms that have raised their salaries then begin receiving an increasing influx of interest from law students and lateral attorneys all wanting to make more money due to the higher salaries.  This is particularly pronounced in smaller law firms because the gap is often further divided between what they are receiving and the largest law firms are paying.  Law firms that do not match their salaries are left in a position where they are likely to lose associates due to these lower salaries.

Associates also begin to feel they are extremely valuable at this time.  Message boards popularity increases dramatically and the chatter and banter between associates begins to get somewhat out of control.  Interest in lateral opportunities outside of the highest-paying law firms increases.  Interest in relocating from lower paid to higher-paid cities increases.  Dissatisfaction of in-house counsel with their salaries compared to law firm associates, also increases.

The influx of interest in working for the largest law firms also emboldens these larger law firms who begin to feel they are very desirable places to work again.  With a heightened interest in working for their firm, the law firms start believing that their existing associates are more expendable.  The amount of work expected of the associates increases.  Some lateral movement also increases in response to the higher work demands.

Law firms also begin having many more people to hire due to the salary increases.  This means that they also increase their hiring.  More associates are hired and the firm will generally grow quite rapidly in a narrow space of time

As the firm grows so do the profits of the partners.  These rising partner profits become a further incentive for associates to work hard an make partner.

It is worth noting that in this atmosphere everyone is also not always happy.  While an exceedingly small percentage of the attorneys in America earn the sorts of salaries associates at the largest law firms do, the ones that do not never feel good about themselves.  Many feel there is something wrong with them and are very envious.  The truth is there is nothing wrong with these attorneys-they are simply not part of the same economic paradigm.
3. The Tide Stops Rising and Reverses

What goes up must generally go down.  This adage is true in the practice of law as it is elsewhere.  As salaries rise law firms begin aggressively increasing their overhead. Most law firms are not more than a month or two away from bankruptcy to begin with and at some point a series of economic events causes the amount of work flowing into a law firm to slow does.

This work can slow down dramatically or it can fall off a cliff.  I remember that I saw the market almost grind to a complete stop in November of 2000 from what had been a very, very brisk bit of hiring.  All of a sudden, it seemed, law firms simply stopped getting as much work as they had previously from their clients.  The work literally came almost grinding to a halt.  In other periods, this slowdown has been more gradual.

While this is not a paper on economics, the fact is that the good times cannot ever roll on forever in any economy.  As particular technologies reach a saturation point (or great amounts of capital chases inefficiencies and loses) things always have to change-unless there is a complete sea change in how things are done.  This is precisely what happens in large law firms now because they are so well connected with the forces of industry around them.

When the tide stops rising and reverses law firms simply cannot afford to pay as many associates as they used to.  In addition, they also have certain pressures which further complicate the situation. The largest pressure the law firms face is "You cannot take away something you have already given."  Salaries therefore do not go down when the tide turns.  They remain where they were.  Bonuses may go down, however.  In addition, expectations of what is required generally dramatically increase.  So too does insecurity …

You must always remember that a law firm is a socio-biological organism and the desire of any socio-biological organism is to survive at all costs.  In order to survive a law firm must maintain its partners who are bringing in the most revenue.  This the most important thing for the law firm.  Consequently, when economic patterns in society change the law firm is very unlikely to suddenly start shedding its partners who bring in income.  Instead, it will do everything it can to hold onto its most economically productive partners. The law firm will also do everything it can to eliminate its economically unproductive partners and eliminate its excess overhead of associates.

Non-productive associates will immediately begin being let go in droves when the economy weakens and the work stops coming in.  The associates from the poorest schools and with the least desirable backgrounds and lowest billable hours will generally be let go first.  Associates who have made close alliances with the most productive partners will generally not lose their jobs.  Corporate attorneys will generally be the very first to go.  The associates in danger of losing their jobs may be moved to other floors of the building.

Corporations will begin being extremely conservative with their work once the economy starts changing course and will bring in as much of it in house as possible. Many legal projects requiring outside counsel will be put on the back burner until things change in the economy.  Many of these same corporations will simply go out of business.

Law firms will begin eliminating associates through "trumped up" negative assessments in performance reviews and also by eliminating a lot of lateral hiring.  This pattern will continue until the law firm stabilizes.  Some law firms simply "flame out" overnight like Brobeck did in the 2002.  The list of calamities will go on and on and on.

Many associates will leave the practice of law completely because there are not a lot of jobs in corporations either.  These associates will talk about wanting to do alternative sorts of legal careers.  Lots of families will be hurt and bad stuff happens.  The traffic to message boards will begin being filled with more gloom and doom-but less traffic.  Law school applications will decrease.  Hiring standards will return to what they were inside the most desirable law firms.  Associates will feel more expendible.

The pattern will repeat itself.

Conclusions

Not everyone wants to believe what salary wars mean.  What happens in this "war" is as old as the hills and the product of economic cycles that repeat themselves over and over and over again.

What I like to take from this pattern is this: You can either work on your career or in it.  The person who is a strategic player will always be watching for patterns and avoiding the negativity and issue surrounding it before it strikes.

You can also make the good work for you and if it is your moment in the site then please enjoy it-just always be aware that there is something else around the corner.  What you do in both good times and bad is a testament to your character and what will become of your career and the course of your life.

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