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Salary Compression, Lock-Step & Adding Value

I was intrigued to hear that Pennsylvania firm Fox, Rothschild has refused to raise first-year salaries to the new $140K market-rate. Of course it was their rationale that piqued my interest. Their refusal is based, ostensibly, on the rather boldly-obvious reasons that: 1) they didn't want to further impact their clients on rates; and 2) that the partners "had no stomach for the increase." No doubt. You've gotta give them credit for honesty.

Why Whine?

It is true that clients cannot be thrilled with the industry-wide raise in salaries. Still, clients as a group have been complete lambs about massive rate increases over the past ten years (well, basically) so I really don't see the point of drawing the line at how the most junior associates are compensated.

It is also perfectly clear that higher first-year salaries do not mean that all big-law lawyers are suddenly richer. Rather, of course, it means greater compression in the ranks: the difference between what a first-year and what a sixth-year makes tends to shrink for all but the very wealthiest firms (and it is pretty impacted even there).


Where I differ with many on the issue is that I do not think this is a terribly bad thing, nor do I think that it impacts retention. Regardless, I think it is unavoidable. The real question is what the implications are for the practice.

The Rub

And the implications are these; the industry as a whole is moving toward a dawning realization that the value-added of any particular piece of hum-drum legal work (research, drafting, even arguing) carries with it only so much value. In short, legal work, or certain types of legal work, will be and are becoming commoditized. An expensive commodity, albeit, but a commodity nonetheless.

Not that firms will not pay more for higher-quality work (there will always be $400 per hour associates at white-shoe big-law and $120 per hour associates at small defense shops). Overall, however, we are moving away from a paradigm that values time-in-service. I don't think clients should be complaining necessarily that they are paying too much for first-year work (they always chew this down in terms of hours-cutting anyway). What they should be thinking is "why should I pay x% more for the fourth-year version of this?"

New Billing Schema

I'll cut to the chase. We are moving toward billing schema that value project billing over hourly calculations and we are moving toward ever-increasing squeezing of associate compensation at the top. The true (and basically only) dividing line in compensation will be between partner and associate. Thus, associate salaries will approach (although likely never reach) a single, austere plateau of hegemony.

The real, and only, interest will be in partner compensation. And by "partner" I mean to emphasize the "project manager" aspect of legal work versus those performing lawyerly tasks. Moreover, partners are going to stop wearing all three hats simultaneously (1: shareholder; 2: manager; 3: worker), and begin wearing just one or two at a time.

Parting of the Ways for Partnership qua Partnership

Thus, partnership itself will become more rigidly differentiated. Once we adopt the Clementi reforms, we will have (hat number 1) non-working and even non-lawyer "shareholders" who can't or need not practice (IOW income based merely on equity position will become a reality one way or another). Once partner compensation becomes more universally tied to aggregate, "team" performance, we will see partners begin to let go of billing for their own analysis and spend the bulk of their time keeping their fee-earning troops motivated and in line (in short: truly managing as a primary function) (IOW, hat number two). Finally, we will see a distinct minority or partners who continue to bill out their own time as high-level strategists (hat number 3), but their compensation will be far beneath that of their colleagues, except for a rock-star few.

Thus, the triumvirate of phenomena: increased salaries for junior associates, compression of associate salaries overall, and the realization that the true value-added kicker in terms of chargeable rates wil be the management of legal work, rather than the 'mere' performing it.

To all the Fox, Rothschilds out there: rather than worry about the impact on your clients of higher compensation for your junior associates, worry more about attraction of talent in the first instance and how your overall billing scheme fits into the new, coming paradigms.

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