The High Price of Escalating Associate Salaries
By James J. Sandman

Leading New York firms recently raised the base salary for a first-year associate to $160,000. That’s before bonuses, which at year-end 2006 were generally an additional $30,000 for first-years, across the board, at the big firms.

The New York increase can be expected to have a ripple effect across the country. Other large cities may not go as high as New York, but many will go up significantly.

I am very familiar with the market forces that cause a law firm to increase its associate salaries to match the competition’s. In the war for talent, I understand that you lose if you pay anything less than the going rate. But I don’t understand what causes a firm be the first to increase the salary of a brand-new lawyer from an already eye-popping $145,000 to $160,000. There is no competitive advantage in doing so. Other firms will surely follow suit, and the firm that led the market will quickly be indistinguishable from the rest of the pack. More importantly, though, I think first-year associate salaries at big firms have gotten to a level where increases are very bad. They are bad for the law firms that pay them, for the associates who receive them, for the clients who foot the bill for them, and for the society we serve.

For the law firms that pay them, astronomical associate salaries increase pressures on profitability, which take a heavy toll on firm culture. In terms of recruiting and retaining associates, I think the higher salaries are wasted dollars. The supply of new lawyers is constrained by the limited number of graduates that our law schools produce every year; paying more won’t have any material effect on the size of the applicant pool. And despite high salaries, the average attrition rate among big-firm associates has topped 20 percent in the last couple of years. Is there any reason to think that more money will keep associates longer and drive attrition rates down? I don’t think so.

Associates leave big law firms in spite of the money and not because it isn’t enough. Higher salaries will do nothing to give associates greater responsibility, more rewarding work, better training, or increased access to mentors—the things that many associates who leave big firms say they wanted but didn’t get. I’ll give you even odds that higher salaries will only allow associates to pay off their educational debts sooner, put down a mortgage on a house earlier, and leave big law firms even faster than they have been.

For those associates who do tough it out, these higher salaries are not a happy development. There is no free lunch. Higher salaries inevitably mean higher billable-hour expectations and even less work–life balance. Greater emphasis on revenue generation seems inevitably to reduce the quality of lawyers’ lives.

Smart associates who have been around for a while knew before the latest round of salary increases just how much money doesn’t buy. Newer lawyers and current law students will learn soon enough.

Sadly, these high salaries will attract a number of those who are just entering the profession to positions that are not suited to their interests, their talents, their temperaments, or their long-term objectives, but that offer the quickest option for paying off that crushing debt load. And so some of this number will be introduced to the profession in a way that will cause them to become disillusioned very early in their careers—and maybe to give up on the profession as a whole because they were so poorly matched to their first job.

And what of the clients? It’s disingenuous to suggest that they won’t end up being charged for higher associate salaries. Although the cost of a salary increase may not be passed along in immediate rate hikes, it will be eventually. There is no increased value to accompany the higher rates, particularly not for inexperienced lawyers. Of course the firms’ argument will be that price is simply a function of supply and demand and not a measure of intrinsic value. But I think that first-year associate rates—which in some big firms in some big cities were more than $265 an hour before the latest salary increases—may be reaching a point of such disconnection from intrinsic value that the client market will reject them. I don’t know if there is an economic principle to describe that phenomenon, but my instincts tell me that there is a point where customers perceive prices to be irrationally high, revolt, and force a reordering of the market. Stay tuned.

Stratospheric law firm associate salaries have ripple effects throughout the legal profession and societal consequences beyond. When a first-year associate makes $190,000 in salary and bonus and a federal district judge makes $165,200, the allure of the federal bench for the best and the brightest is diminished. When the disparity between law firm salaries and government salaries reaches the point it has now, some lawyers who would otherwise have been attracted to public service will not be able to make the sacrifice, and the public will be the poorer for it. When legal services providers offer a starting lawyer $120,000 less than a lawyer starting in a big firm, the job of serving the poor, never easy, just got harder. I know these are all different markets, but there are intersections among them, and what goes on in the law firm segment affects life in the others.

I don’t for a minute begrudge hardworking law firm associates a handsome living. They didn’t ask for increases that were triggered by one law firm’s misguided notion of what motivates them. I hope they are able to get some enjoyment out of the additional dollars. But my advice is this: Don’t become dependent on the money. Live below your means, and be generous. Once you’ve got your educational debt under control, do what you want to do because you love it, not what you have to do to maintain a lifestyle. Remember why you went to law school: to make a difference. And follow your heart.