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Will the Latest Associate Compensation Hikes Affect Lateral Movement?

© 2018 The Texas Lawbook.

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By Randy Block of Performance Legal Placement

(July 10) – Outside of professional sports, there is no industry where thousands of 25 year olds can earn around $200,000 annually. That’s not a bad thing. Lawyers possess a skill set relied upon by almost everyone in society – and they charge a premium for these services.

With several large law firms around the country recently raising associate compensation again, it’s a good time to analyze whether raises make sense for certain firms and whether these raises should affect the decision-making of associates when it comes to joining or remaining at firms.

Over the past month, there have been new associate raises emanating from large New York-based law firms. Several of these firms have offices in Texas where the compensation has also been raised to these new heights. In turn, a handful of Texas-based law firms have also matched.

The current compensation scale starts at $190,000 for first-year associates, along with a guaranteed summer bonus of $5,000. The range tops out with eighth-years making $340,000 plus a summer bonus of $25,000. That’s a tremendous amount of money, and it keeps with a tradition of raising associate salaries.

Here’s the recent history of base salary raises for first-year associates:

• Prior to 2000: $105,000
• 2000: $125,000, a 19 percent increase
• 2006: $145,000, a 16 percent increase
• 2007: $160,000, a 10 percent increase
• 2016: $180,000, a 12.5 percent increase
• 2018: $190,000, a 5.5 percent increase

Raises for midlevel and senior-level associates have been up to an additional 5 percent increase over the first-year raises.

In 2000, the 19 percent raise was a seismic change. The new 2018 raise of 5.5 percent is not nearly as significant. This time, the average increase is 7 percent per class year (first through eighth years).

Will associates be motivated to switch firms for a 7 percent raise? I doubt it. But at the end of the day, though it is easier for me to recruit to a firm that pays the top of the market, it is necessary to get good talent.

Not every large law firm has matched these raises immediately. Some have taken years to match. Some match only the first-year salaries and then have compressed raises for the salaries of their other associates.

In 2007, most every Texas-based law firm adopted the strategy of deferred raises. This meant making small guaranteed raises for base salaries and then matching the New York numbers after an associate billed 2,000 hours. Just as importantly, many Texas law offices (for both national- and Texas-based firms) do not match New York bonuses, which currently range from $15,000 to at least $100,000.

But this difference between the two states is not a matter of New York firms being more generous than Texas firms. New York firms have to frequently raise compensation because the cost of living there is so oppressive. I recruit many New York associates to Texas who recognize that their money goes about three times further here due to the much lower cost of living and lack of city and state income taxes. Firms in Texas do not have to pay exactly the same compensation as New York City firms because the Texas associates will still have considerably more money in their bank accounts at the end of the year while spending much less money on much nicer living conditions.

An associate pays for an older 700-square-foot apartment in Manhattan for over $3,000 per month in rent. Or they suffer through a two-hour daily commute in order to have a house with a yard and more than 1,000 square feet. Associates in Dallas and Houston can live in posh apartments much newer and larger than their New York counterparts and still be minutes from their offices. Midlevel associates in Texas can easily afford 3,000 square foot homes and luxury vehicles without the horrendous commutes.

New York firms also have to consider raising compensation because their associates generally are in their offices about 12 hours per day, 6 days per week. Texas associates average 10 hours per day, 5 days per week. New York firms must immediately match their competitors for fear of losing their overworked associates who need every penny they can get to live a mediocre life in Manhattan. Texas based firms rarely give complete lockstep compensation matches because the desperation is simply not there.

Should law firms in Texas raise associate salaries? It simply comes down to whether a particular firm believes it can recruit and retain its necessary talent at its current salary levels. If a firm wants to have the same talent as Kirkland and Cravath, the answer is yes. I speak with enough young associates to know that the money matters but the prestige that accompanies it matters just as much. But in the case of these latest raises, the percentage increases are fairly nominal. First years saw a 5.5 percent increase and the largest percentage increase was 9 percent for sixth years.

While the internet hype machine about these raises begets more water cooler talk and more recruiter phone calls, is this small of a raise enough to convince an otherwise happy associates to part ways with the law firms that has fostered their careers? Frankly, money matters more than any other factor to the vast majority of associates. But an average raise of 7 percent across the board (first years through eighth years) should not motivate movement when past raises have been at least twice as high.

What associates should consider

Associates should examine whether a firm’s base salaries are matching at all levels or just for first years. And whether the base salary levels are lockstep or subjective. Many firms make the responsible decision to tie compensation to a subjective year-to-year examination of the associate’s previous performance. Similarly, firms may give bonuses as lockstep, based on hours or subjectively. It would seem that everyone would want lockstep for base salaries and bonuses, but it is not always that clear.

Short-term money is good. Long-term money is even better. What someone makes between ages 25 to 33 years old can have a great impact on student loans and starting a family. But the ability to make a strong income between ages 34 to 70 years old is where I recommend placing the focus. Of course, the ideal firm will cover an attorney from start to finish financially, and those firms do exist.

When considering a law firm, look at the long term. Specifically, at what experience level associates typically make partner – and more importantly, what percentage of third-year associates advance to partnership. These are questions that should be asked during the interview process by anyone who is really serious about making long-term money. If a firm “rents” associates for 9 or 10 years, then sends them away to the in-house market, the long-term big money will not be there for those associates. But to each their own. Many attorneys crave the in-house life and are more than happy with making less than they did as a fourth year in exchange for fewer hours, more control and never recording their time.

There is big money and then there is really big money. It’s difficult to make over one million dollars annually at most any law firm in Texas without a book of business or at least being an essential part of a relationship team dedicated to key clients. Being a service partner can have its advantages in terms of receiving good compensation without managing client headaches. But the biggest money will always go to the partners with their own clients. For associates with aspirations of making millions per year, they should consider whether a law firm platform is suited for them to create – or inherit – a book of business. Factors include billing rates, marketing support, mentoring for business development and most importantly whether the firm actively encourages younger attorneys to get their own clients.

Culture matters, too. Attorneys deserve to be happy. It’s difficult to predict based on a series of interviews whether a particular law firm is the perfect fit. But it’s fairly easy to predict that a currently bad situation will not get better.

I speak with miserable attorneys every day seeking a “forever firm” where they can just be happier. Attorneys want to get paid what they feel they are worth in the marketplace. They also want to work in collegial environments, work reasonable hours and feel that they have the right amount of autonomy, responsibility and mentorship. It’s usually a balancing act between money and culture. The firms that pay $100,000 starting salaries are usually the firms where associates get the most autonomy and responsibility, and often feature the most reasonable hours. Collegial environments are found at firms of all sizes and compensation scales. Compensation raises have historically led to higher billable hours and longer partnership tracks. Rarely is there a free lunch. With more money comes more expectations.

At the end of the day, associates should take a holistic approach to choosing their law firms. Looking merely at their current base salaries is shortsighted. The sharpest associates will consider base salary as well as bonus amounts, how those amounts are determined, how many hours are expected, partnership track, business development, firm culture and how these different factors all fit together to help them meet their career and personal goals.

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