Given the state of the legal market following the Great Recession, with client demands for lower costs and a buyer’s market for legal talent, law firm leaders should consider replacing their current system of junior-associate hiring with something more akin to a residency program.
The system of recruiting top graduates of America’s top law schools, developed in the 19th century by New York’s Cravath, Swaine & Moore, established a training program that rotated these new lawyers through various practice groups and, after several years, promoted the best to partnership. Compensation was lockstep, increasing with each passing year at the firm, and annual bonuses were based on billable hours. Because of its success, the “Cravath” model spread quickly to the rest of the major law firms, where it has remained steady for more than 100 years.
And then came the salary wars. In the 1990s, thanks to a booming Silicon Valley, which offered outrageous salaries to lure new lawyers to its new market, associate starting salaries jumped from $90,000 to $125,000, then to $140,000 and finally settled in at $160,000.
Cravath’s hiring and training model itself wasn’t a bad idea. It’s the too-high compensation for inexperienced associates, combined with rate pressure and demands for efficiency from today’s ­clients, that makes the system unsustainable.
Since the Great Recession, there’s been much talk about the need for industry change: Clients are taking more control over legal spending, too many lawyers are charging too much per hour and compensation structures designed to reward inefficiency are on their way to the chopping block. And yet, in the five years since the fall of Lehman Brothers, little has changed in the way large law firms recruit, train, bill and operate or more broadly think about and manage their only resource — their people.
Despite client demands for lower rates, fewer hours and discounts, coupled with an increasing refusal to pay for the work of junior associates, law firms have not reacted appropriately.
Still overpaying junior associates, relying on the billable hour and rewarding the biggest billers with the biggest bonuses, the vast majority of major firms trudge onward. By making tweaks to billable rates, exploring alternative fee arrangements, reducing the number of new junior lawyers and writing off some fees, law firms continue to dance around implementing better, more universal solutions.
Over the past decade, the client has changed. Many clients today hire former large-firm lawyers to lead their law departments. These attorneys are sophisticated and knowledgeable about both the practice of law and the business of the billable hour. Under increasing pressure from CEOs to manage legal spend, general counsel have put pressure on law firms to better predict costs, manage budgets and respond more nimbly. These changes at the corporate level demand more changes from law firms, which up to this point have reacted in baby steps that suggest a belief that the “old normal” is coming back — a belief the market does not support.
The first place to start is with a major adjustment to the out-of-step starting salaries of junior lawyers. Fresh out of law school, junior lawyers should start as a “resident” with no promise of long-term employment. Throughout a two-year residency program, junior lawyers could rotate through several practice groups and be given full billable credit for all training exercises — from firm-sponsored formal training in the art of litigating, negotiating and business management, to tagging along to depositions, negotiations, arbitrations, hearings, trials, client meetings and pitches with more senior lawyers, as well as pro bono work.
If law firms acknowledged that these junior lawyers are not earning their keep with a full load of client-chargeable work product, they could set salaries accordingly by cutting the current first-year Big Law salary in half, which would be more in line with the approximate $50,000 first-year medical resident salary. And if they wanted to sweeten the deal while assuaging concerns about the indebtedness of new lawyers, firms could offer loan repayment assistance.
At the end of the two-year residency program, the firm and the candidates would be able to make informed decisions about which residents deserve offers, and which type of offer is suited to each candidate.
Some attorneys could be made associates and their salaries bumped up to current first-year associate salary levels. Others could receive an offer of a staff attorney position, with salaries commensurate with the new title. And for others still, they would receive no offer to join the firm.
How would a change of this magnitude affect a firm’s ability to recruit top talent? Significantly. Considering that firms have spent generations following the few willing to lead the charge, however, it won’t be easy. But if law firms are going to survive in this ever changing marketplace, creative solutions are needed.
Although a residency program is but one possible approach, tackling the untenable associate compensation model may be a credible first step in the design and implementation of modern strategies to meet the needs of clients, to promote more efficiency and to truly hire, train and promote the most talented lawyers.•