Cravath Salary Raises Pressure Rivals Who Can’t Afford Match (2)

Cravath Swaine & Moore’s move to raise associate salaries beyond the scale set by its rival Milbank pressures less-profitable firms to ponder pay bumps they can’t afford.

While firms in the top tiers of revenue and profitability are likely to follow Cravath’s lead—and several already have—others in the industry are ill-positioned to do so, said Michelle Fivel, a legal recruiter at Hatch Henderson Fivel. “This could be the year” the pool of firms following Cravath shrinks, she said.

The prospect of Cravath-type raises will “stress a lot of firms,” said Peter Zeughauser, a law firm management consultant at the Zeughauser Group. Some will avoid such raises and suffer the fall-out of “more poaching” from firms that can pay top compensation, he said.

Cravath, the standard-setter for salaries in Big Law, said Nov. 28 it will raise annual pay to a seniority-based scale of between $225,000 and $420,000. The move matched Milbank’s surprise increase Nov. 7 for junior lawyers, though Cravath doubled Milbank’s $10,000 boost for senior associates.

A growing list of other law firms said in the aftermath of Cravath’s announcement that they will match the scale. Those firms include Kirkland & Ellis, Paul Hastings, McDermott Will & Emery, Paul Weiss Rifkind, Wharton & Garrison, Davis Polk, Baker McKenzie, Dechert, Cleary Gottlieb, Hogan Lovells, Sidley Austin, Fried Frank, and Mayer Brown.

“We are all competing for the smartest minds in this industry,” Miguel Zaldivar, Hogan Lovells CEO, said in an interview. “In a competitive environment where you cannot reach out to other firms to benchmark, you just have to react to these market changes and be ready.”

Cravath declined to comment on its reasoning for the new scale. Milbank chairman Scott Edelman cited “high levels of activity” across the firm. Milbank two years ago engendered the last round of salary increases, with first-year associate base pay then rising to $215,000.

The salary boosts come as a shock to many in the industry because such raises traditionally arrive during boom times. Instead, work at many firms fell off dramatically from the peak in 2021, when a frenzy in the deals market pushed the industry into an unprecedented war for talent.

Pay bumps are “happening at a time where associate productivity is at some of the lowest levels we’ve seen,” said Les Starck, a consultant in Wells Fargo’s legal specialty group.

Several firms contracted this year. Orrick Herrington & Sutcliffe in June said it was laying off 90 attorneys and staff. Dechert a month earlier cut 5% of its workforce, including 55 lawyers. Orrick, Perkins Coie and Fenwick & West pushed back the start dates for some first-year associates entering their firms.

Spiking Billing Rates

The Milbank raises that kicked off the pay-raise wave show that some firms are getting a “disproportionate share of the work that has been available,” said Owen Burman, a consultant at Wells Fargo’s legal specialty group.

Net income among the biggest 50 firms in US was up 5.2% on average through the first nine months of the year, according to a Wells Fargo Legal Specialty Group survey published in November. For the next 50 largest firms, net income was down 0.7%.

The biggest 50 firms also posted stronger revenue growth than other parts of the industry, the survey of 120 law firms found. The survey included responses from 65 firms ranked among the top 100 in revenue by the American Lawyer.

Firm leaders typically have two options to pay for the cost of a salary boost—require associates to work longer hours or increase billing rates, Fivel said. Major law firms have over the past decade raised their rates at significant levels, which has helped some maintain revenue gains even in times of flat demand.

Revenue gains this year were largely driven by an average billing rate increase of 8%, according to the Wells Fargo survey. That’s the “highest growth in billing rates” the bank has recorded, and it is anticipating rate jumps to stay at that same level next year.

“Firms were able to push through higher rates” in 2023, Starck said. “They feel emboldened to continue to do so.”

—With reporting by Mahira Dayal and Tatyana Monnay