I don’t know if you have noticed, but several elite US law firms are engaged in a full on salary rage. It all started on 10 June when Millbank announced that it would raise the salaries of 1st year associates to $200.000 (for their German office starting salaries were raised to €160.000).
One day later Davis Polk announced $205.000. Since then the parade of associate salary increases has yet to come to an end, with law firms such as Weil Gotshal, Sidley Austin, Sullivan & Cromwell and Clifford Chance all unveiling raises in line with the scale set by Davis Polk & Wardwell. If salaries keep increasing at the current pace, starting lawyers might be making half-a-million by the end of this decade…
As ludicrous as it might seem to pay someone fresh from university and without any relevant experience a $200.000-plus salary, for the elite firms that have leapt into the latest round of associate salary increases, even after issuing special bonuses earlier this year, it’s a no-brainer. Many posted record profits in 2020, and surging deal work this year places them in a position where these added expenses will likely have little to no impact on their profitability in 2021.
What puzzles me, are not the salaries as such. What does puzzle me is why these elite law firms have to resort to such extreme salaries in the first place. Let me explain: imagine you are a freshly graduated cook, and it is your ambition to one day become a Michelin star chef. What would you do? You would most likely try to get an apprenticeship at a Michelin star restaurant, to learn from a famous master chef.
Last weekend I read an interview with a well-known sommelier, she literally followed that route and early in her career was ever so grateful that she could work in the cellars of a famous restaurant, even as the hours were bad and the salary low.
If you want a career in the fashion industry, you must try to get a poorly paid apprenticeship at Vogue or one of the great fashion houses. So why is it that aspiring top-lawyers only want to work with the elite firms if they are paid a ludicrous amount of money...? It does not make sense. Having Sullivan & Cromwell on your resume will open doors and is worth more than a Harvard Law School degree. So what is going wrong here?
Two weeks ago, I published an article highlighting the issues that associates are dealing with right now. Many are close to a burn-out or even facing mental health issues. As I wrote in that article, “in the first quarter of this year, more lawyers left their firm, than in the whole of the year before. At the same time, because of the amount of work, law firms are desperately trying to hire new talent. Partly to replace the ones that left and partly to scale up production. These two conflicting interests of overworked lawyers at the one hand, and almost out-of-control demand and the opportunity to make unprecedented partner profits, are at a high risk of spiraling out of control”. This was written just hours before Milbank send out its press release.
The elite law firms need the hands to get the work done. Not having those hands will harm their revenue and profitability. This league of elite law firms is closely monitoring each other, as they can not afford to get out of line with their peers. If the PEP at one firm would drop out of pace, it would immediately lead to a departure of high-potential rainmakers and an inability to attract lateral talent to fill the gaps. Joining the salaries-race is therefor not an option but inevitable. Ending up in this situation is however the result of poor strategic choices in the past.
Multiple times, in previous articles, I have written about the Creation-Production-Divide Concept©. In short the Creation-Production Divide Concept© distinguishes between two components in the legal process. On the one hand there is CREATION, which is the process in which the legal strategy is decided. This component is heavily reliant on human skills. It does typically not involve a great amount of time and it is what has the greatest value to the client. The 'Creation' is what makes one lawyer different from the next. This is where specially the elite law firms should invest. This is what gets them their clients.
The second component, PRODUCTION. Execution/Production is mostly labor intensive and therefore costly, but it has little added value to the client. There is also not much relevant difference between lawyers as it comes to production. This is the part of the process the elite law firms should have almost completely automated by now.
The problem these law firms are having with automating production, is that they fear it will undermine their business model. Since lawyers are billing for time, they will make more money as they spend more time on the client. Investing in technology to make lawyers more efficient, feels like spending money to earn less. This does not fly well if you are in a tight race to remain in the top-10 as it comes to PEP. So here we are, we need to hire more people to just do ‘document work’ most of the time. Work that to a large extent could be done by a small number of lawyers who are augmented by technology.
The elite law firms have to resort to paying crazy salaries to apprentices that should in theory be eager to work for peanuts, just for the learning experience. The reason being that these young lawyers are clever enough to understand that they to a large extent will just be ‘document monkeys’ working on ‘Production’. Since all the value is in ‘Creation’ this (production) is not a relevant learning experience. If talented young lawyers were offered the opportunity to ‘carry the bag’ of an experienced partner and be in his/her presence most of the time, accompanying to important client meetings, they would perhaps even be willing to accept the statutory minimum wage. Just being a cog in the billing machine, no thank you, then I want my fair share of the profit.