Its NBA Finals time and LeBron James is once again on the court. It’s been almost six years since he rendered “The Decision,” proclaiming to millions tuned into ESPN that: “I’m going to take my talents to South Beach.” His infamous declaration is textbookhubris or chutzpah—maybe both? I was reminded of it by the recent reports that Cravath will now pay $180,000 to first year associates. That came on the heels of Law 360’s disclosure that some New York- based law firm partners now charge $2,000/hour. Chorus: hubris or chutzpa—maybe both?
LeBron has established his worth by tangible metrics (and some intangibles, too). He cashed in on a free agent bonanza fueled by the NBA’s economic model that supports his regal compensation. But such is not the case with the associate and senior partner hikes at a handful of law firms. The corporate legal market is one where client dissatisfaction is high, demand for law firm services is flat, more work is being done in-house or by service providers operating from lower-cost structures, belt synching is rampant, and the new mantra is “do more with less.”
Why, then, would Cravath and a handful of other firms that matched its bump draw attention to themselves in this way when the optics are so bad—especially with clients?
Using Numbers to Differentiate?
Let’s start with the Cravath salary hike. Cravath grabbed headlines when it announced the first starting associate raise since 2007. It did not take long for a handful of high-profile firms to match the $180K prize nor for pundits to weigh in with explanations. Bill Henderson, a professor (and friend) who focuses on the legal industry, commented that Cravath’s bump was the firm’s way of ensuring its historically successful efforts to attract the “best and brightest” at a time when competition for premium graduates has intensified due to declining LSAT scores and law school enrollment (and sky-high law school tuition). Translation: the premium legal talent pipeline is thinning.
Cravath and the small cadre of $180K firms are vying for a rarified—statistically insignificant– segment of newbie lawyers. Landing a job at Cravath, Quinn Emannuel, or the handful of top-paying firms—all of whom have smaller first-year associate classes than they once did—is a statistical long shot for almost any law graduate. It’s as unlikely as being drafted by an NBA team. Yet the focus of the legal press-and many firms- is on what law’s (less than) one-percent earn, not the vast majority of law graduates for whom paying off crushing student loans and finding a job are major challenges. And like the NBA draft where lottery picks don’t always become “impact” players, it’s fair to say that this small band of $180K wet-behind-the-ears lawyers is unlikely to drive much value to clients until they acquire some practice skills. So how do the economics work?
So maybe the $180K is Cravath’s way of saying: “we’re the best; we invest in the best; and that’s why we will remain the best.” But does that wash in a market where: (1) most clients won’t pay for first year associates, let alone those who must bill at rates to support a $180K salary; (2) associate turnover is extremely high; (3) only a small fraction of associates make partner (and business origination, not scholarship, is the ticket); and (4) the partnership model is under assault.
Everyone knows that Cravath partners and their counterparts at other elite firms are very well compensated. Those PPP numbers are celebrated in The American Lawyer’sannual compensation survey. Perhaps the starting salary bump (which also augments salaries of other firm associates) is also a proclamation of resistance to sweeping changes in the legal marketplace. It’s a way of saying, “We can do this because we are different—and special.” Or maybe it’s a symbolic way of announcing the firm’s full recovery from the glum day in 2009 when it paid incoming lawyers about half of their first-year salaries to defer starting for a year. Perhaps it’s “trickle down economics,” a sign to incoming lawyers that-at least at this firm- all those ominous signs that the party’s almost over don’t apply. Whatever the psychological rationale, one wonders why firms would so publicly point their index fingers at consumers in a market where buyers now have the power.
One thing is indisputable: this will rub many clients and legal consumers the wrong way. It’s completely contrary to market demand for more value and enhanced efficiency. It’s heavy metal at a chamber music festival.
Legal Expertise at $2,000/Hour
Five years ago the The Wall Street Journal reported that some lawyers were charging $1,000 an hour. Then this Spring, The Guardian disclosed that some Magic Circle partners billed at $1,500 an hour, and I questioned whether that could be good value. And now, a short time later, Law 360 reported the top rate on this side of the pond has reached $2,000 an hour. It’s an odd time to have a rate hike war, isn’t it? And why, when senior partners at elite firms are already pulling in upwards of $4million a year do they need to draw additional attention to their compensation by upping rates (2,000 hours@$2,000/hr.=$4M– and that does not take into account “partner tribute)?
So why the enormous rate hikes at a time when significant discounts from rack rates are routine-even with major cases- and so much “high-end” work is being done in-house? Has there been a breakthrough in legal expertise known to a select few at a handful of law firms? Have the lawyers who charged the high-end five years ago become twice as valuable to clients? Good lawyers understand optics; it’s an element of their craft. Why, then, would they effectively dare clients not to use them by charging rates sure to raise eyebrows if not cause indigestion?
Ego is the simple explanation. You see this with athletes, actors, CEO’s, and others—some people simply must be the highest paid for what they do. That works so long as the industry’s model supports it and the optics are acceptable. But is this the case with legal services—especially now?
Some other explanations for the rate hike are: internal leverage within the firm (more profitable and entitled to bigger slice of partnership profits); enhanced attractiveness as a lateral; publicity; and creating the impression that “I’m so good that market forces affecting other lawyers don’t apply to me.” One more time with feeling: hubris or chutzpah—maybe both?
Lawyers are free to set billing rates and associate pay as they deem fit. But when those numbers are so out-of-sync with marketplace trends, it’s fair to ask “why?” First year salaries of $180K and $2K billing rates—significant bumps at a time of belt synching—bespeak indifference- even disdain- for consumer demand to rein in legal cost. And whatever the rationale for the lawyers and firms charging these numbers, it will no doubt amp up consumer ire. And it will likely turbocharge efforts to mine legal expertise from other sources, operating in different structures, and providing greater value. That’s the bigger story behind these numbers.