Whenever Biglaw executes a round of associate salary raises, some partner at some firm — almost always an Am Law second 50 if not second 100 shop — will declare that it will all end in tears when firms have to lay off these high-priced associates the next year. And whenever there’s an economic speedbump, someone is going to proclaim that Biglaw would’ve gotten away with it without laying anyone off if it weren’t for you pesky kids earning higher salaries. It’s a finely tuned narrative machine. Honestly, it’s not even clear that these partners do it on purpose… it’s like they’re psychically compelled to spread this message.
Yesterday, the American Lawyer featured the latest in this time-honored tradition:
Meanwhile, other law firm leaders in the Am Law 100 are confident that their more measured hiring and compensation practices will be enough to stave off layoffs at their own firms.
“You’ve got a lot of firms out there that from an image perspective believe they have to match the Cravath scale or at least get very close but they don’t generate the profit margins that those firms do,” said Cozen O’Connor CEO Michael Heller. “By overpaying their associates, they have to literally just lay those associates off.”
In a word, balderdash.
On its face, the statement contends that the layoffs we’re seeing stem from firms paying market and cutting profit margins to the bone. Except… that’s not really indicative of the firms laying people off.
Orrick is delivering north of $3M in PEP with RPL over $1M. Same for Cooley and Fenwick & West. Gunderson doesn’t report that data to Am Law, but it’s hard to believe it’s fallen into pauperism. Stepping away from the tech-heavy layoffs, both Goodwin and Dechert meet the $3M+/$1M+ threshold. Hell, Goodwin chased its layoffs by immediately turning around and hiring more high compensation lawyers putting the lie to the idea that its layoffs are salary related. Of the high profile layoffs, only Reed Smith misses these financial numbers with PEP at $1.6M and its RPL just a hair under $1M. So maybe those layoffs involve a little profit taking… though they aren’t fully matched with the Cravath scale anyway!
If the general rule for compensation is to pay attorneys roughly a third of what they bring in, then without knowing the distribution across class years, the Cravath scale would back of the napkin fit for all these firms. The average associate is making around $300K and producing about $1M. Perfecto.
So how do we always end up with this fantasy that rising associate compensation drives firm layoffs? And why does it always arrive like clockwork after a couple force reductions?
It’s posturing — both vertical and horizontal.
Cozen, at $1.1M PEP and an RPL of $850K, pays a step below market. The firm has to sell its sometimes unhappy associates on the prospect that the grass is greener on this side of the fence. Layoffs afford an easy opportunity to spin lower compensation as doing the lawyers a favor. “Our fiscal conservatism may annoy you in the boom times but we don’t have to lay you off like some firms,” is a compelling if not entirely accurate message. That’s the vertical posturing.
Horizontally, firms competing for talent without the benefit of matching compensation always fear another round of hikes putting them even further behind their peers. When the conventional wisdom is that “raises beget layoffs,” it’s a passive signal to peer firms (and not-so-peer firms) to hold the line. Orrick isn’t struggling to pay Cravath salaries… but Cozen might struggle to compete when Orrick joins Cravath on another salary war adventure.
Again, I honestly don’t think these folks realize what they’re doing. It’s just an article of faith to some partners out there regardless of market reality.
So, no Virginia, there is no such thing as a salary induced layoff. There are firms unwilling to pay associates in practice groups that aren’t currently busy. Maybe they’re right to save that expense, maybe they’re just compromising future success when those areas roar back and they’ve jettisoned needed capacity. But that’s what’s going on. Not a bevy of elite law firms scraping by with razor thin profit margins because of a bunch of greedy associates.
Layoffs Are Spreading. After All, There’s Only So Much Work to Go Around [American Lawyer]
Joe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news. Joe also serves as a Managing Director at RPN Executive Search.