Cravath Swaine & Moore’s recent decision to boost associate salaries above the scale set by counterpart Milbank has initiated ripples throughout the sector, pushing less profitable firms to face the uncomfortable question of how to answer with pay increases they might not afford. The distinguished law firm announced on November 28 that it will establish a seniority-based salary range from $225,000 to $420,000 annually, countering the unexpected elevation signaled by Milbank on November 7 (Bloomberg Law).
This development by Cravath, known for setting salary standards in the upper tiers of law, presents a troubling prospect for many firms, according to Peter Zeughauser, a law firm management consultant with the Zeughauser Group. To sidestep these raises can lead to “more poaching” from law firms capable of paying top compensation.
Seven other giants in the industry — Paul Hastings, McDermott Will & Emery, Paul Weiss Rifkind, Wharton & Garrison, Baker McKenzie, Dechert, Cleary Gottlieb and Hogan Lovells — have already stated they will match the scale in response to Cravath’s announcement. “We are all competing for the smartest minds in this industry,” said Hogan Lovells CEO, Miguel Zaldivar, in an interview. He added that in a competitive environment, firms must “react to these market changes and be ready”.
The motives of Cravath for the new scale were not disclosed, but Milbank Chairman Scott Edelman pointed towards “high levels of activity” across the firm as the reason behind their increase. The salary bumps have thrown the industry into a state of shock as they usually coincide with periods of economic prosperity. However, this round of increases comes at a time when work in many firms is significantly declining from a 2021 peak, triggered by a flurry of deals which propelled the industry into an unprecedented talent war.
Les Starck, a consultant in Wells Fargo’s legal specialty group, notes that the pay bumps are occurring at a time “where associate productivity is at some of the lowest levels we’ve seen”. In 2021, several firms made cutbacks, with Orrick Herrington & Sutcliffe laying off 90 attorneys and staff in June, while Dechert cut 5% of its workforce, including 55 lawyers, the previous month.
Meanwhile, industry data shows a clear divergence in trends between the biggest firms and the rest. Net income among the top 50 firms in the United States saw an average increase of 5.2% through the first nine months of the year. Conversely, for the next 50 largest firms, net income was down by 0.7%, as per a Wells Fargo Legal Specialty Group survey from November.
Firms typically resort to two tactics to balance the cost of a salary boost – require associates to work longer hours or hike billing rates, says Michelle Fivel, a legal recruiter at Hatch Henderson Fivel. Revealed by the same Wells Fargo survey, revenue gains this year were fueled primarily by an average billing rate increase of 8%, the highest growth in billing rates Wells Fargo has recorded thus far. It expects these rate jumps to persist at the same pace next year, given how “firms were able to push through higher rates in 2023”, adds Stark, leading to the emboldened continuation of this trend.