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Forbes Article by Rimon CEO:  Law Firms Join The Destructive Dance To Higher Associate Salaries

Insight Michael Moradzadeh Michael Moradzadeh · July 15, 2016

(Go directly to article in Forbes here.)

In the most enduring and infamous comment from the subprime meltdown, former Citigroup CEO Chuck Prince explained away his company’s disastrous leveraged lending before the crash with the comment that “as long as the music’s playing, you’ve got to get up and dance.” This comment is a perfect example of unthinking follow-the-herd behavior by corporate leaders.

Right now, law firms may be witnessing a version of this story. Ever since Cravath Swaine & Moore raised its first year associate base salary to $180,000, firms have been either falling over themselves to match this new high or hiding in the hopes that they can weather the criticism of not paying the absolute market ceiling. The associates, especially more senior level associates who frequently get a raise themselves during the process, are leaking firm memos to law firm news sites such as Above the Law in the hope of embarrassing their firms to match.

This type of behavior has happened to law firms in the past. An early precursor to the law firm news websites, a message board known as greedy associates, helped push salaries to $125,000 in 2000. Once a number of dominos fell, the other firms hurried to meet the new salary expectations. Back then, there was a real concern from firms that the top associates would quickly flee to try and take part in the tech bubble. Once that bubble burst, salaries remained stagnant until approximately 2005-6, when firms again raised in a herd during the peak of the mortgage bubble. Salaries went to $145,000 and then $160,000, where it remained for almost a decade.

For the associates, this type of behavior is a big boon. Individually, it certainly makes sense that they would leak the memos and try to force raises. But for the firms, and especially a certain class of partners and senior associates, the raises can be a high stakes gamble that does not favor them.

The raises have grabbed the unwanted attention of a special constituency – clients. There are numerous stories about firms charging over $1,000 an hour for their work. What these stories don’t talk about is the flip side. Clients may be willing to pay top dollar for top legal advice, but they are not at all interested in spending money on helping to train low-level associates who simply don’t know anything about the practice of law. The result is a heavy push back on bills and the need for law firms to simply write off low-level attorneys’ work. In fact, the general counsel of Bank of America has already commented that his is not willing to pay more as a result of this salary raise and Allstate general counsel said, “[O]ne must question the merits of a business model that compensates fresh law school graduates, who are devoid of any meaningful lawyering experience, with a salary greater than that of a seasoned in-house corporate attorney with a decade or more of experience counseling senior leaders in our organization.”

For partners at the top of the heap, this loss is barely noticed because they have more control over their team and billing process. But for more junior partners, the danger is clear. The clients are upset about the potential cost and have little interest in screaming at you to scream at your partners for a discount. The result is that they are more likely to take their business elsewhere, where billable hours for junior associates are not as big of a sticking point.

The expense of highly paid junior associates presents a clear danger for firms. They have a challenge of either not having enough staffing or of having a big expense on their bottom line that they don’t expect to pay off for years to come. As we have seen many times, this could mean dislocation and trouble at the top of the firm, a problem that reverberates down the food chain.  Firms such as Dewey, Brobeck, Howrey and Heller all ended up collapsing once they overleveraged themselves and their costs proved to be too high to manage.

The push to raise associate salaries presents a real gut check for traditional law firms. Chuck Prince’s line is particularly apt, though it’s not a dance that firm’s may have to be concerned about. It could be that it is more a game of musical chairs. And when that music stops for law firms, many of them may discover that they have a big expense but nowhere to sit.

Guest Post Written by Michael Moradzadeh