At the end of last week, it looked like the salary increase contagion was being contained. A firewall appeared to be emerging at around the 40th most profitable firm. This week, four firms from the 60th to 80th profitability tier—Monger Tolles, Morgan Lewis, Baker McKenzie, and Brown Rudnick—announced they’d match the elite firms’ salary moves, breaching the firewall, see Figure. The move is ill-conceived, a baffling act of leadership, and a risk to the long-term health of middle-profitability firms.
Middle Law (firms ranked about 40 to 120 by profits per equity partner, PPP) has a well-recounted strategy problem: by continuously raising prices, these firms have driven clients to take more and more work in house. The requisite firm response is to contain costs so as not to exacerbate their weakened economic competitiveness relative to in-house counsel. Increasing associate salaries disavows this reality; doing so at this point of the business cycle disavows rationality.
Salary increases by Middle Law were unnecessary. Greenberg Traurig, ranked 56th by PPP, had publicly laid out the case for not moving now. Based on this, there was a good chance a firewall would be established negating the need for a firm of lower PPP to move. Even if a firm felt compelled to award associates extra cash there were ways to do it that didn’t involve baking the increases into the industry’s long-term cost structure—e.g. one-off bonuses, bonuses tilted toward the more senior associates, or more creative solutions. Most of Middle Law was simply watching and waiting, a reasonable approach one would think.
The explanations one hears for why these four firms moved are befuddling. One is that while the four are lower PPP than the elite, they are large firms—Baker McKenzie and Morgan Lewis are, respectively, the 3rd and 8th largest Am Law firms by revenue. By this logic, Wal-Mart should pay its 2.2 million employees the same as Google pays its 88 thousand workers. I heard one firm say that to assess the need to match salaries the firm’s leadership relied on the views of their hiring partners. This is like asking a company’s salesforce what they’d like the company’s price to be. Another purported rationale is that the increase was necessary to compete for talent. Really? I can’t imagine a hiring partner at a top 20 firm thought this week “Oh no, these four firms have matched, now what will we do?”.
The explanations ring so hollow it’s clear something else is going on. My hunch is that firm leaders felt compelled to match the top firms’ compensation structure so they can avoid sending an unequivocal message to their partners that they are not at an elite firm. Paying associates more indulges the collective vanity and perpetrates the mass delusion. There is nothing wrong with that other than it also reinforces the organization’s collective resistance to facing up to the realities of the marketplace. It’s not obvious why a firm’s leadership would chose to do this. It’s an analgesic, comforting the frog in the slowly-heating water.
There’d be a certain justice in these increases if the only firms damaged were those who made the precipitous moves. Alas, this is unlikely to be the case. Rather, firms of comparable stature now come under increased pressure to self-harm also. Where will it stop? Reed Smith, ranked 81st by PPP among the Am Law 200, have laid down a new Greenberg-like marker by suggesting they are disinclined to move citing ‘interests of clients’. It’s 40 firms lower in PPP rank than where the firewall could have been set, but hopefully one will emerge.
Middle Law has a set of challenges distinct from those of the high-profit elite. Facing these challenges would be helped by uncoupling the cost structure of the two segments. The opportunity was there to do it. It may well have been blown. There have probably been comparable moves in other industries, but they don’t flood to mind.
Hugh A. Simons, Ph.D., is formerly a senior partner and executive committee member at The Boston Consulting Group and chief operating officer at Ropes & Gray. He writes about law firms as part of the ALM Intelligence Fellows Program. He welcomes readers’ reactions at HASimons@Gmail.com
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