Extravagant salaries, it doesn’t matter
Updated: Jun 18, 2018
Last week on Monday 4 June, New York based Milbank, Tweed, Hadley & McCloy announced that it will increase its associate salaries across the board by $10,000 or $15,000. With a $190K starting pay for those fresh out of law school. What followed was an outcry in the legal media and clients being reportedly unhappy about Milbank associate raise announcement.
Also other legal markets have reported steep inclines in associate salaries by the big international firms. JUVE, the German legal weekly, reported competition for talent with some international firms paying up to 130.000 Euro ($153K) for a first-year associate. A development that has left many German law firms worried.
War for talent
With so many emotional reactions, in this article I will try to put things in the right perspective. As explained in my article from last week, being an excellent lawyer will revolve less and less around legal knowledge. In the future clients will not primarily be looking for knowledge of the law but will increasingly engage lawyers because of their knowledge of ‘best market practice’, their ability to negotiate a good deal, their ability to come up with innovative solutions, and so on. In other words: Human Skills
So law firms need to start hiring a different breed of associates in order to be able to meet changing client demands. As law school still focus on legal knowledge, the best grades will no longer automatically reflect the best lawyers. Forward thinking law firms need to try and find those graduates that are smart and possess these extraordinary human skills. With the present system of education this is a bit like looking for a needle in a hay stack.
The salaries do not reflect present commercial value, it is an investment.
If offering extravagant salaries is needed to attract the most talented, then this is what it takes. No law firm will expect to make a profit or perhaps even break-even. These high salaries must be seen as an investment where return will only come with time. It is reasonable to expect these talented individuals to be above average profitable after five years or so when human skill can be paired with substantial experience. By then these individuals will be in high demand by clients.
The financial reality
“In-house leaders didn't pull punches in their evaluation of Milbank's big associate raises” according to an article in The American Lawyer. The article describes how clients are saying that they will not accept having to pay for this. In order to understand the magnitude of the pay rise we need to do the math’s:
Milbank globally has 531 associates. On average each associate gets a pay rise of $12,500. So the total cost associated with the pay rise is $6,637,500. Milbank’s gross revenue over 2017 was $916,538,000. With a profit margin of 55% total cost are $412,442,100. This means that the total cost effect of the pay rise would be only 1,6%.
Even if clients would have to pay for it, this will hardly be noticed.
The total cost effect of the pay rise is only 1,6%...
The surprising thing is how much attention an investment in human talent gets compared to any other investment. If a law firm the size of Milbank would invest $6,6 million in IT, I doubt if this would draw the same amount of – negative – headlines. Substantial investment in other areas hardly draw any attention and still they have the same effect on costs.
The human factor
It might be that we relate these salaries primarily to our own income or to the salaries of other professions. A lot of the attention seems focused on the starting salaries that are seen as extravagant. No one coming fresh out of university could be worth so much money. When focusing only on the immediate market value this is probably true. But if the talent that clients are looking for is rare, then the rarity rather than the ratio will establish the market value. It is the same with classic cars as with professional athletes.
In my opinion the legal world, including clients, should stop ‘complaining’. In-house attorneys have become very smart and well educated. If an in-house team decides to seek outside counsel they are looking for extraordinary skills to provide the value they are looking for. To provide this value law firms need to invest in human skills. This inevitably starts with attracting rare an extraordinary talent. Rarity has its price. This is an investment by the law firm hoping that in the future this will enable them to serve their clients better.
Also other law firms should stop ‘complaining’ in my opinion. As demonstrated in the financial calculation, raising the salaries by 5% will have a limited effect on overall costs. Law firms need to define their strategy and think about what they will have clients to offer in five years’ time. In order to stay competitive investments will be required. From a financial point of view it does not make a difference where this money goes. Just put it to the best possible resource. This might very well be humans.