IF THE ECONOMY'S DOING SO BADLY, WHY ARE LAW FIRM SALARIES STILL SO HIGH?: Stable Salaries Offer Window Into Law Firm Culture

Whoever said "what goes up must come down" might have understood the law of gravity, but wasn't very familiar with large law firm salaries.

During the heady days before the economic bubble burst, large firms from New York to San Francisco hired huge numbers of junior associates (with many firms welcoming Fall entering classes of over 100), and dramatically increased lawyer salaries across the board. In early 2001, the top of the wave, many mega-firms began paying first-year associates a whopping $125,000-$140,000 a year, exclusive of discretionary year-end bonuses that could tack on another $25,000 or more.

To put these numbers in perspective, consider that Chief Justice William Rehnquist pulls down $186,300; the District Attorney of New York (that's the DA himself, not his assistants) gets paid $150,000; and an average tenured law professor in America makes somewhat less than that. Consider also that as recently as 1985, first-year associates at top Manhattan firms earned (in today's inflation-adjusted dollars) "only" $80K.

The Bubble Bursts - But Not For Associate Pay

Today, the underlying market forces are markedly different. One might expect that bubble-era law firm hiring trends would reverse themselves, and in some respects they have. Firms are noticeably reducing the size of their Summer associate and Fall entering classes, and many firms have laid off scores of young associates. The San Francisco Bay Area has perhaps seen the most layoff activity - with at least 7 major law firms letting go significant numbers of able young associates simply because there is not enough work to keep everyone busy. But the layoff phenomenon has been a national one, with firms in Chicago, D.C. and New York also hit hard.

The past year's layoffs are not just normal attrition based on "performance." It has always been true that many associates are routinely, if quietly, asked to leave firms because they don't fit in or their work is subpar. It is also true that during the runup, many firms - because of a felt need for bodies - hired some lawyers whose credentials were below those firms' historical standards. Nevertheless, the majority of lawyers let go in recent months have credentials and potential that are just as good as those of the young lawyers who are kept on at their firms, and of those who are making up the firms' Summer associate classes.

In other words, most of the layoffs have nothing to do with individualized assessments of future lawyerly promise. To their credit, many firms have been acknowledging this forthrightly.

Interestingly, though, with a few exceptions (like Pillsbury Winthrop and Gray, Cary), firms have NOT significantly reduced salaries in response to tough economic times. They have, to be sure, held the line on salary increases, and have also reduced the size of discretionary bonuses, but they have not cut into the huge base salaries that grew so fantastically over the past five years.

This base-salary stickiness seems somewhat counterintuitive, given basic laws of supply and demand. Why shouldn't the price paid to young lawyers, like the price paid for, say, oil, go down when supply exceeds demand? Indeed, wouldn't we expect law firms to ask everyone to make a salary sacrifice so that no (or at least fewer) lawyers will have to get pink slips?

Why Partners Don't Cut Their Own Draws To Avoid Downsizing

For starters, it is worth asking why partners don't simply accept reduced equity profits in bad years in order to avoid associate layoffs. The answer, of course, has to do with greed, but the psychological dynamic may be complicated.

As Edward Lazarus pointed out a few months ago in a column for this site, partners at big firms enviously compare their earnings to compensation packages of the lawyers' most successful clients - successful business executives. (This has accounted for the increase in partners' draws and the corresponding increase in billable hours necessary to support those draws.) But partners also compare their earnings to their own past earnings. And once you make close to a million dollars a year, it's hard - apparently - to go back to making a measly $600,000. (It is worth noting that although some firms, like San Francisco's Brobeck, that laid off large numbers of associates did see a substantial drop in profits per partner in 2001 compared to 2000, other firms that laid off lawyers did not see steep drops. And even in shops where profits per partner declined, 2001 was still often the second best year on record, behind only the phenomenal 2000.)

Why Firms Opt For Layoffs, As Opposed To Pay Cuts

That we can't expect partners to sacrifice too much themselves still doesn't explain why partners (who set firm policies) don't spread the pain among ALL associates, rather than terminating an unfortunate subset of them.

One possible reason is that the people who are most hurt by the layoffs are not around to complain. Those remaining lawyers at the firm who are spared the axe are happy to be there, and happier still that their base salaries remain intact. Better to have fewer relatively happy people around, partners might think, than to have everyone who is around unhappy that their wages have been reduced.

If plausible, this account is disconcerting. It suggests, among other things, that associates don't feel much loyalty to each other, and that partners don't much mind losing young associates to mentor. This lack of associate/associate and associate/partner loyalty may help partially explain why so many people find big firm practice alienating.

Suppose the partnership polled all the associates well in advance of an economic downturn, asking whether they would prefer layoffs or salary reductions. Perhaps a majority of associates would prefer the layoff route; if so, partners who opt to fire rather than cut pay would simply be doing the democratic thing.

But consider what that might tell us. In addition to a lack of loyalty/sympathy for those who will lose their jobs, such a response would suggest an arrogance on the part of most big firm lawyers - the "I'm not going to be the one who's let go" attitude. If this attitude exists among lawyers, it probably adversely affects the dynamics of litigation and other kinds of practice. Given this kind of culture, is it really surprising that lawyers often refuse to settle cases they should settle, in part because they overestimate their own chances of success?

What about the effect of layoffs on a law firm's reputation in the law schools - the source of future employees? Law firms carefully cultivate their images among law students, lavishing time and money on promotional materials, websites, and Summer Associate programs. Do firms believe that their standing in law schools will go down more if they cut salaries rather than lay off lawyers? If so, consider what this suggests about the attitudes of law students.

To begin with, law students - like their slightly more senior associate counterparts - may be arrogant enough to believe that they are not going to be the ones laid off by a firm, so that a firm policy of laying people off doesn't scare them. "So long as I get a foot in the door, I'll prove I'm worth keeping" is an admirable attitude, but only up to a point. If this is the kind of mindset that law schools themselves are creating, perhaps we in the academy need to do a better job.

Indeed, and somewhat ironically, a firm that avoids layoffs by cutting salaries might actually HARM its image in the law schools by suggesting that - because it doesn't pay as much as some other firms - it is a "second-tier" shop. Nice guys, that is, may finish last. Everyone laments the long and brutal hours and lack of esprit de corps at many firms, but those law firms that have tried to carve out a different image by stressing lifestyle over top salaries have a tough time recruiting top students at top schools. What does it tell us about the kinds of lawyers we are creating that the biggest sweatshops are often the most sought-after places?

Or perhaps partners believe that law students simply won't know or remember which firms laid off associates and which did not, when good times return. If a firm wants to be rewarded for loyalty, that loyalty has to be known in the world. But exactly what is the attention or memory span for law students, even from top schools? Regrettably, it is not as long as we'd like to think.

Law schools are part of the "what have you done for (or perhaps, to) me lately" world in which we live. If we polled our students at the University of California or Yale law schools, and asked: "Which firms laid people off in the recession of the early 1990s, and which firms tightened their belts to avoid layoffs?," very few students would know.

They don't learn that stuff in law school, and unfortunately it wasn't covered when they studied gravity in high school.