Prediction for 2015: A Round of Salary Increases for the Elite Firms

The legal market is at a trigger point.  That’s our sense of it here at Kinney Recruiting.  And that’s why we’re making our prediction for this Holiday Season:  this will be the first year since 2007 with a round of general associate salary increases at the world’s elite law firms.

It’s hard to believe, but for the entire current crop of associates – first through eighth years at Big Law firms across the country – there has never been one of those sweet little emails or envelopes from the Managing Partner bringing good tidings that the firm is raising the scale of base salaries for associates and providing positive fodder for the comments page at Above the Law.  Ever since Simpson Thacher & Bartlett set the mark of $160,000 for first year associates in 2007 (read the original story) it has held in place as the top tick of the market.  As legal-salary historians know, that move was generally copied by other firms, with various safety measures to prevent payment of top salaries to less “productive” team members.

But this year (or early next year – the 2007 salary hike was announced in January) we expect the wheel to turn again.  Our basis for making this prediction is very simple, and even someone without our inside knowledge within the firms in question could make it.  Just look at the numbers published by the American Lawyer, Above the Law and other trade journals, which show profits per partner (“PPP”) surging at the top tier firms, and take a look at associate salaries in percentage terms relative to those numbers.  True enough, the financial recovery in the legal market has been uneven, with continuing softness and excess capacity in many segments.  But after a few years of belt-tightening, as the deal economy has gradually come back to life, the top end of the legal market is doing better than ever – and then some.  Take Cravath, for example, where PPP has bounced all the way back from the 2007 level of $3.3 million to $3,448,000 in 2013.  The same is true at Sullivan & Cromwell and a handful of other top firms, where PPP now exceeds the pre-recession levels.  But in the same time frame, the needle hasn’t moved on associate salaries.Law Firm Profits per Partner

Some folks seem to think that associate salaries are somehow correlated to geography or cost of living, but we’ve been around long enough to remember the way the elite firms play this game, and it has nothing to do with zip codes or inflation.  For a handful of firms in New York this used to be a game of bragging rights when they showed up for campus interviews at Harvard and Yale.  But more than that, for the better part of three decades the elite firms steadily kept inching salaries up every year to make sure that they continued to attract the best talent in the graduating class.  For a handful of firms with solid foundations in New York, salaries will always be uniform across their network, as the game is about drawing the best and the brightest young minds to the practice.  Now that partner profitability has come roaring back, we expect to see the elite firms resume the game.

But the interesting question this time around is what sort of effect a salary increase is likely to have on the rest of the market.  In the old days, as the elite firms bumped salaries up, the rest of the market would eventually fall in line behind them.  But as many commentators have noted, there is a striking divergence taking place between the top end and the rest of the law firm market in this recovery, with this noticeable surge in PPP among a relatively small handful of firms.  With few exceptions, firms without a solid foundation in New York deal work, even though the best of them have also seen PPP increases, have simply not been able to keep up.  If we’re right and the elite firms decide to bring their associate salaries closer to the level of their long term average (in terms of percentage of PPP), weaker firms will be unable to match without annihilating the gains they have made in their own profitability.  This will undoubtedly accelerate the pace of change throughout the ranks of American law firms.