A few weeks ago, the renowned New York law firm of Cravath, Swaine & Moore, one of the heaviest hitters in the legal industry, announced that it was raising the starting salaries of its associates. The June 6, 2016 announcement instituted $20,000 pay raises for first year associates across the board, increasing base salaries from $160,000 to $180,000 per year. Eighth year associates will now receive annual starting salaries of $315,000. Salary increases were to kick in as of July 1.
The move came after Cravath associates raised the issue of base salaries at its firm town hall meetings. The leading rationale behind raising salaries was that associates had not seen increases in almost a decade, with the last round of raises coming in January 2007. The cost of living, particularly in a city like New York, has increased dramatically in that span of time, as have the cost of attending law school and the amount of debt most new attorneys are carrying.
The Cravath announcement has created a ripple effect across the country. And, while associates will gladly take more money, not everyone is as happy about the new developments.
Beyond New York
Not surprisingly, other New York law firms quickly followed suit, matching the new Cravath pay scale. In a less predictable turn of events, the pay raises began to spread to other cities. Now, first year associates in cities like Chicago, Philadelphia, Boston, and Houston, among others, are seeing the same $180,000 base salaries as their New York counterparts.
This news has come as a particular shock to New York associates, given that the cost of living in these other cities is markedly lower. Some industry experts have predicted that the raises in other cities will only accelerate the exodus of top talent from New York that is already being seen.
Client Push Back
While there was no surprise that a firm like Cravath, arguably the most prestigious in the industry, was the first to make a move on salary increases, the move to increase in general came as a surprise to many. In a time when the pressure to cut costs and reduce billable hours is high, increased salaries, to some, seem counterintuitive.
Some major corporations have been vocal about their refusal to foot the bill for the increased associate salaries. Global general counsel for Bank of America went on the record as being against the raises, saying: “While we respect the firms’ judgment about what best serves their long-term competitive interests, we are aware of no market-driven basis for such an increase and do not expect to bear the costs of the firms’ decisions.”
Other companies have echoed these sentiments, claiming that the increases weren’t justified. They also cited recent refusals to pay $400 an hour for first year associate work.
Implications for Law Firms and Billing
Bank of America’s general counsel stressed the company’s desire to see cost-competitive rates and alternative billing arrangements, breaking with the long-time law firm model of charging exorbitant rates. Gone are the days when clients are willing to blindly sign of on legal bills. In fact, the trend has been in the opposite direction—to increased scrutiny of every hour and line item billed.
Instead, companies are now comfortable requesting cost-effective legal services. Many want to see flat-fee arrangements or per-transaction rates, and have refused to pay separately for things that were traditionally rubber stamped, such as legal research, client education, or photocopying. In some instances, clients are flatly refusing to pay for hours billed by the most junior associates. Against this backdrop, the move to increase junior associate salaries seems, to many, more than a little misplaced.
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While not all clients have decried the salary increases, stating that law firms are at liberty to create their own cost structures, the bottom line continues to be value. If clients don’t believe they’re getting adequate value in what they’re paying for, they will not be afraid to take their business elsewhere.
Other analysts have defended the pay raises, claiming that they are simply a plan for wealth redistribution within the firms. As long as the new associate salary dollars are coming 100% out of partner paychecks, which many see as exorbitant, the move should not impact clients and billing.
In fact, these same experts predict that the law firms will not be capable of passing the salary increases on to clients in the form of rate increases. The reason is simply that clients will refuse to pay the higher rates, because they now have the option not to. Clients, and not firms, now hold the power over deciding what is an acceptable rate for legal services. This power shift has only been strengthened by the increasing number of alternative fee models being offered in the industry.
Verizon’s General Counsel has been quoted as saying that an attempt by law firms to translate higher salaries into higher billing rates “simply encourages me to look for alternatives, whether moving the work in-house or moving work to lower-price firms.”
If anything, industry experts are hoping that the new round of salary increases will force law firms to reassess their business models and the value they offer clients. Clients are now in the best position ever to demand value billing from their legal counsel.
In the months and years to come, there is a high likelihood that the industry will see an increased shift toward more client-friendly business models, such as flat-fee billing on a monthly or transactional basis. Now more than ever, the focus in the legal industry is on providing cost-effective legal services in the most efficient way possible.