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Is Following Cravath’s Lead the Best Way to Set Salaries?

June 8, 2016, 2:28 AM

Setting associate salaries at top law firms seems to be a fairly simple process.

“Cravath raises, we raise,” said Scott Edelman, chair of the New York law firm Milbank, Tweed, Hadley & McCloy, in an interview Tuesday after making a quick decision to raise the 650-lawyer firm’s starting salaries for associates, from $160,000 to $180,000.

The news on Monday that Cravath, Swaine & Moore would increase its first-year salaries by $20,000, to $180,000, set a domino effect in motion of other law firms matching the salaries, a process that’s been accepted for the most part as the industry standard. The firm also raised junior and senior associate pay by $20,000 to $35,000 annually.

Not 24 hours went by since Cravath’s memo leaked to the legal blog Above the Law (as is also tradition) that four other top law firms announced that they would raise to $180,000: along with Milbank; Paul Weiss Rifkind Wharton & Garrison; Cahill, Gordon & Reindel; and Weil Gotshal & Manges.

Edelman described the process by which associate salaries were decided as fairly simple. He discussed the news of Cravath’s pay raise with his executive committee on Monday evening, and simply announced that the firm would match it the following day.

“We see no reason to have our associates in suspense about it,” said Edelman.

It’s a tough sell to cry for large law firm associates whose base salary ranges this year anywhere between $180,000 to $315,000 depending on seniority at elite firms. But the process behind how their salary is decided every year is unusually impromptu, unlike other industries, according to legal experts.

“It’s very odd,” said Brackett Denniston, the former general counsel of Generic Electric, who retired last year. “I don’t know many industries where that sort of thing occurs — especially an industry with as many participants as the law.”

The tradition, of course, has its exceptions. The prominent Washington law firm Williams & Connolly, as The American Lawyer notes , has long paid first year associates ahead of New York-based law firms, by paying $200,000 for starting attorneys — although some firms can outpay that by giving out large bonuses. Lower-tier law firms, meanwhile, don’t necessarily expect to match the Cravath salaries, although they take note of them. And litigation boutiques have generally been able to offer higher salaries and bonuses to associates because they have fewer lawyers to spread the wealth.

Another nuance is that the salary increases reflect base salary, and a good portion of an associate’s earnings is tied to bonus. For the past nine years, base salaries have remained relatively flat, but firms have opted to reward junior lawyers through increases in bonuses instead, with the thinking that it offers more flexibility in volatile times. Bonuses are announced in either November or December, and are usually announced first by Cravath. Last year, the firm announced bonuses of between $15,000 to $100,000 to shower on top of the junior lawyers base level of pay. But Cravath is not always the first. Sometimes firms embark on a pricey PR campaign and jump ahead in the pecking order. In 2014, Simpson Thacher & Bartlett beat Cravath to the punch when announcing associate bonuses of $15,000 to $100,000, as reported by Above the Law.

There are signs that firms are also taking advantage of marketing opportunities in the latest base salary news.

Hueston Hennigan is one 35-lawyer litigation boutique that capitalized on the Cravath move. A spin-off from the large law firm Irell & Manella, it announced just within a few hours time of the Cravath news that it would set first year starting salary at $180,000, with senior associates earning $315,000.

Similar to Edelman of Milbank, Los Angeles litigator Brian Hennigan said that he and his firm’s partners made the decision to match Cravath quickly, but he saw the expediency as a good thing.

“I think it’s the communication that we are a firm that is competitive when it comes to training associates well, and we won’t be slow to react,” said Hennigan. He said that he received a few emails from partners about the Cravath pay raise on Monday, and decided right there and then, in his Los Angeles office in fourth floor of the Pacific Mutual building, to set the firm’s associate pay.

“The timing was certainly influenced by the Cravath announcement,” said Hennigan. “You see that and you say, ‘This is where the announcement is going, let’s make sure people understand and accept the idea that we are looking out for their best interest.’”

Hennigan said the firm currently is in talks with four associates to join the firm from federal clerkships and elsewhere, while seven associates have agreed to join in the fall. It does not have a summer associate class. With the news of the Cravath match, the firm stands to gain — like every other law firm does in matching Cravath — a substantial marketing push to advertise their firm as a workplace that treats young talent well. And it comes at a time when the pool of top law graduates is shrinking, according to The American Bar Association statistics, and firms are competing more aggressively for the best and the brightest.

Associates at large law firms and legal industry observers portrayed large law firms as being conservative in nature, and questioned the motives of management.

One Big Law associate who spoke with Big Law Business on the condition of anonymity because he was not authorized to speak publicly griped that generally speaking, “the profits go to the top.”

“We’re still making a decent living at the bottom, but I’m just saying, 2007 was the last time they made a raise,” said this lawyer, who noted billing rates consistently rose during the past nine years — by three to four percent each year, according to Wells Fargo, which tracks law firm data.

Another associate at a large law firm said of the recent raise: “Once the initial excitement of the salary increase wears off, many associates will agree that it was about time, and start wondering if firms will increase again.”

General counsel contacted by Big Law Business did not know exactly what to make of the associate salary news. On the one hand, general counsel want their law firms to attract top talent, but on the other hand, they don’t want the increase in salaries to affect their rates.

Said Craig Silliman, the general counsel of Verizon, in an email:

“To the degree that law firms are reallocating their profits by giving first year associates higher salaries, then this is about their internal business model and it doesn’t affect me. We don’t pay for first year associate work, but to the degree that the firms are raising salaries across the board and they try to push through these pay increases in higher billing rates, then it simply encourages me to look for alternatives, whether moving the work in-house or moving work to lower-price firms.”

Susan Hackett, a legal consultant who has close ties with the in-house world, said that the salary raises still reflect to her what’s wrong with the legal industry and are little more than a marketing push.

“I don’t think that this is, at the end of the day, a lot more than a one-upsmanship of a lot of big firms,” said Hackett.

“I can see the general counsel looking at this and going, ‘Oh, Jeez.’ Not that this is going to make a difference on their bill, but it’s an indicator that firms aren’t paying attention to what it is that really matters.”

The salary raises went on before the recession for years.

Stephen Gillers, a law professor at New York University Law School, said that Cravath began the tradition in 1968 when the firm raised starting salaries to $15,500, which “got a lot of attention.” Today, he said, that salary, adjusted for inflation, would be about $106,000.

“So a starting salary of $180,000 is an increase of about 75 percent, which is remarkable.”

Edelman was unfazed when asked about client concerns.

“Everybody gets a sticker shock when they look at it, I’m sure,” said Edelman. “But when clients have a problem, they want to make sure they’re getting a firm that attracts the top talent. Clients may not like it, but when they have a big deal, a big crisis, they want to make sure they have top lawyers.”