The hike in associate pay will lead to a crisis in the legal sector forcing badly-managed firms on both sides of the Atlantic out of business, a transatlantic forum on this year’s salary rises has warned.
The forum, organised by Levick Strategic Communications, was made up of a panel of lawyers and consultants, who met in London last Friday (9 June). They agreed that only the best managed and most focused firms would be able to absorb the extravagant pay rises being handed out to assistants.
Angelo Arcadipane, managing partner of Washington-based Dickstein Shapiro Morin & Oshinsky, said the increases were a symptom of a profession in flux, and firms would have to respond by restructuring their practices.
Arcadipane said his own firm had been forced to respond to the “irrational market forces” that were fuelling the pay war, which was sparked off by Silicon Valley firm Gunderson Dettmer Stough Villeneuve Franklin & Hachigian at the end of last year.
He revealed that his firm had abandoned the lockstep system for paying associates by making pay rises performance-related.
“It makes no business sense to pay someone more simply because they have been out of school longer,” he said.
Arcadipane added that the firm was also looking at how it staffed teams of advisers to get better leverage out of its qualified staff.
“We are going to have to be smarter,” he said. “That is going to require different types of staffing decisions so that it may not be necessary to put $125,000 (£78,000) associates on doing certain kinds of discovery work. That work might be done just as well or better by a paralegal or by a staff attorney.”
But he predicted that firms would be unable to absorb the costs of the pay rises without passing them on to their clients.
“These changes are going to impact on the associates: how they are treated and their lifestyles. It is going to hit the partners, their pay packets and how they view their associates. And it is going to impact on our clients. No matter how we structure things, there is going to be some rate inflation.”
Peter Scott, former head of Eversheds’ London office, said there was little thought behind the pay rises.
“They have just been accepted,” he said. “But which market is driving them – the US or the UK? Somebody is going to have to stand back and say ‘this is all too much’.”
Scott said firms were overpaying lawyers and overstaffing offices.
“There is going to be a big problem, and something has to give. Firms must decide how much manpower they really need. Everyone has become complacent because there has been so much work recently.”
The panel agreed that firms would have to do everything in their power not to pass the cost of the salary hikes on to their clients by increasing charge-out fees.
That meant getting assistants to work harder. “If they thought it was tough working weekends, soon they are going to be working weekends, evenings and nights,” Arcadipane said.
However, the panel said firms could ride out the pay war if they responded imaginatively to it.
David Temporal, of management consultancy Altman Weil, said mid-tier firms should attempt to compete with the magic circle.
“These rises are going to shake out the men from the boys,” he said. “In a couple of years, when the froth starts to come off the market, we are going to see some of the firms that have allowed their salaries to become inflated experience some trouble. At the present time those firms are forced to go with the flow and raise salaries, but what I have not seen so far are more imaginative ways of attracting and keeping people.”
Sally Horrocks, a director at recruitment company ZMB, agreed. “There is not a lot of careful forward thinking going on about what will happen when the economic buoyancy becomes more brittle. We could be faced with serious problems then – we saw a lot of lawyers being made redundant a couple of years ago.”
US law firm training consultant Bill Flannery, warned that firms that blindly raised associate pay without thinking of the consequences would fail when the economic climate took a downturn.
He compared law firms to a sports team that had bought too many big players when they were doing well, saying that firms can only afford to have a few people in making a lot of money.
Otherwise “when the stands are not filling, and the ticket holders do not pay the price, then you have a big business problem, and some firms are going to go paws up”.
