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.
