Feast or Famine Market Threatens Big Law’s Prestige Bubble

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. This week, we look at how changes in associate pay may force some firms to change their prestige-driven strategies. Sign up to receive this column in your inbox on Thursday mornings.

There have been signs recently that the gap is widening between the richest Big Law firms and the rest of the pack. But the news this week—Wall Street firms unlocking war chests to boost partner pay and making splashy associate bonuses—brought that trend into sharp perspective.

First came news that Davis Polk & Wardwell would modify its lockstep compensation system, a move one commenter said adds another firm to “the nuclear weapons club.” Then one of the few remaining lockstep firms, Cleary Gottlieb, lost a leading M&A partner, Neil Whoriskey, to Milbank.

Meanwhile, a survey released this week shows that Big Law partner salaries over the past decade have drastically diverged. Top-end partner pay has risen 46% over the period while low-end partner pay grew at 15%, according to the Major, Lindsey & Africa analysis.

Now the market for associate compensation is suddenly facing a long-rumored moment of reckoning. What “Above the Law” called “COVID-19 bonus wars” could cause firms to rethink their position in the market.

Cooley got things rolling with “special bonuses” to associates that ranged from $2,500 to $7,500 with some extra-busy associates earning “significantly in excess” of those numbers, according to a memo reported by “Above the Law.”

Davis Polk topped that by starting its special bonus tier at $7,500 for first-years and handing out $40,000 a piece to senior associates. The bonuses were in recognition of high activity levels at the firm, according to an internal announcement obtained by Bloomberg Law.

All of this activity comes as many firms that scaled back associate pay scramble just to unwind those decisions. Some are paying back the cuts after things turned out to be better than expected, while others are reportedly laying off associates.

It’s hard to see the majority of AmLaw 200 firms matching these “special bonuses.” Unlike past episodes of associate salary wars, wealthy firms are putting the pedal to the floor at a time when many competitors are struggling to maintain the prior speed limit.

“When salaries went to $190,000 there were a lot of experts who said a lot of firms fell in line that couldn’t afford it,” Michelle Fivel, a partner at Major Lindsey & Africa who specializes in associate recruiting, said in an interview. “This time, that’s not going to happen. And firms will have to look inward and be honest with themselves about what they can handle financially.”

I wrote last week that Davis Polk is having a record year in its leading capital markets practice. If the surge in M&A activity this week globally has any shot at being sustained, another financial engine at the largest firms will help them further separate from the pack. The top 50 firms doubled the revenue growth rate of the next 50 in the first half of the year, Citi Private Bank said.

While no firms have said they will raise associate base salaries, Fivel said she wouldn’t be surprised if a wealthy firm made a move after a record year. That will likely have consequences in the competition for top law school graduates, said Fivel, who advises students from Harvard Law School and Stanford Law School on the on-campus interview process. Compensation has traditionally not been a significant factor in associates’ decisions because it is so uniform across the largest firms, Fivel said.

If that changes, some firms that have long insisted they need “top talent” to service their clients may be forced to ask themselves how true that really is. And it is likely that some firms that have strived to be seen as prestigious as the nation’s compensation-setting firms will reconsider their strategy.

“Prestige, especially for attorneys coming out of those schools, is extremely important,” Fivel said. “And compensation scale is an indicia of prestige to them.”

Worth Your Time

On Bar Exams: Washington D.C. is leaning toward granting diploma privilege, while California law deans are urging for the state to administer an open-book bar exam.

On Courts: A bipartisan bill that would grant free access to federal court records is winding through Congress. Meanwhile, the federal judiciary is stressing the need for greater diversity as part of its 2020 strategic plan.

On Business: It is not yet October, and global companies have already sold the most bonds ever in a single year, Bloomberg reported, which has driven a significant amount of work for Big Law firms this year.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.