Cravath & Davis Polk associates are raking it in, and everyone’s got an opinion. Here’s some data to explain how & why the new associate pay scale is a rational move in a functioning market.
Earlier this week, Cravath made waves at every trade media outlet with their 2022 salary scale:
Cravath’s announcement came on the heels of Milbank and Davis Polk each raising the stakes in the ongoing war for associate talent. (See “Milbank Ups Associate Salaries to $215,000 in War for Talent (2),” Bloomberg Law, January 20, 2022, and “Davis Polk ups senior associate salaries in latest round of pay war,” Reuters, February 22, 2022.). Before the close of the week, a flurry of memos followed, with a predictable roster of prestige firms matching the new top-of-market scale: Davis Polk, Paul Weiss, Kirkland, Latham, Simpson Thacher, Quinn, Skadden, Debevoise, Ropes, Shearman, Covington, White & Case, Sidley, Paul Hastings, McDermott, Boies Schiller, among others. (See “Salary Wars Scorecard: Firms That Have Announced Raises (2022),” Above the Law, updated March 4, 2022).
Notably, Milbank has yet to respond to despite racing to first mover position in 2018 and again this year. Also notably, Morgan Lewis is prudently sitting out the betting rounds, with a promise to monitor and match the prevailing scale once set.
Like clockwork, these associate compensation announcements were met with fairly predictable brouhaha and consternation on a number of fronts. For a dash of 2022 flavor, there were memes. Industry prognosticators wondered at the “ridiculous” sums and speculated about the rate increases likely to follow; clients gave dour warnings that such rate hikes would be unwelcome. See “Latest Big Law Salary Increases Prompt Concern and Criticism From Everyone But Associates,” Law.com, January 26, 2022. See also “‘It’s Not Something We’d Accept’: How GCs Feel About Rate Hikes From Big Law’s Salary War,” Corporate Counsel, March 4, 2022.
I got so many questions and comments about associate compensation this week that I’ve decided to address the topic here. I’ll be fairly blunt about my views, which are nearly certain to be unpopular:
🙌 Far from being ridiculous, I find the new top-of-market scale quite well-designed and reflective of current market realities.
🌱 The 2022 scale looks quite different from associate compensation systems of years past. I don’t see this as a continuation of the same old, but rather the beginning of a new era of competition in Big Law.
🔮 On the whole, I suspect the boost to associate compensation will serve to speed up evolution of corporate legal buy and the overall pace of legal innovation.
To support the above unpopular opinions, I pulled together some data. (Yes, I went back through Above the Law’s Salary Watch… 👏 all 👏 the 👏 way 👏 back 👏 to 👏 2007 👏)
But before we get to the charts, let me add a caveat. Associate compensation represents material cash risk to law firm balance sheets. (For Cravath, the 2022 scale likely comes out to about $10m in additional payroll expense; for Davis Polk, the number is much higher – I’d ballpark somewhere in the neighborhood of $25 to $30m.) Client demand fluctuates from year-to-year (and fluctuate wildly as we saw in 2020 and 2021), and while even the most prestigious of law firms can and sometimes do right-size their workforce, it is not possible for those firms to roll back the base salary scale without ruinous erosion of brand value and market positioning.
In my view, there is a cadre of about 25 firms who can afford to and absolutely should match the pace of lawyer compensation set by Cravath and Davis Polk. Once the dust settles, I suspect a much larger number of firms will be paying out top-of-market salaries and they will likely do so to the detriment of their 2022 partner profits and long-term viability.
In essence, the firms competing to occupy the top of the Big Law food chain are betting big for the next decade. Some of those firms will win big – that is to say, the rest will lose, and a few will lose big.
💸 Let’s Start with Starting Salaries for First-Year Associates 👶
According to the latest U.S. Census reports, median household income in 2020 was about $67,500. As against that backdrop, $215,000 is a lot of money, full stop.
Starting salaries for first-year Big Law associates supply a reliable source of outrage, especially because the topic pairs so neatly with yet another perennial grievance in our industry: the state of the legal academy and its many deplorable failures to produce “practice-ready” graduates.
First-year associates make an easy target. I can confirm from my experiences in various practice settings that first-year associates, by and large, do not earn their keep. In 2022, it still bears mentioning that nobody really expects them to. First-year associates represent an investment in high-potential talent, and so I think a more instructive treatment is to think holistically about return on that investment in the first 3 post-qualification years. On the new scale, this amounts to total base compensation of $690,000, falling just shy of $800,000 target compensation for the highest performers.
Have no doubt these associates earn every penny of that pay. Over those three years, the vast majority of those associates will net a sizable profit for the equity base; you’d be hard-pressed to find a 3rd year associate at a top-flight firm that doesn’t pull in over a million in revenue. (If you do find one, I would bet you my favorite pair of shoes that they won’t be a 4th year associate at that firm next year.)
If history teaches us anything, it’s that the collective consciousness is very quick to forget the past. I vaguely remember flipping through the Vault Guide to Law Firms as an undergraduate at UCLA (and daydreaming of all the shoes I’d buy making $145,000 a year). Soon afterward, the subprime market imploded, and the 2007 pay scale, running $160k to $280k, stayed frozen in place…. for nine long years. Prior to the 2006 & 2007 wave of adjustments, the $125k to $225k scale was in place for 6 years. My congratulations to the class of 2021, but my advice is to salt away what you can for a rainy day. I suspect the associate pay scale will stabilize soon, and the 2022 or 2023 scale will likely stay in place for at least 3 to 5 years.
Since the Global Financial Crisis, clients have largely won the debate about first years. See “Almost All Law Firm Partners Think Their NQs Earn Too Much,” Law.com, February 7, 2022. Many clients decline to pay for first-years, and yet second-year associates must come from somewhere. So what have law firms actually done with the much-abused and much-aligned newly qualified? 👀 Let’s take a look:
In 1987, the high-end starting salary for a Big Law first associate was $68,000. Today, it has seemingly ballooned into $215,000 for a multiple of 3.2 in 35 years. But 35 years turns out to be a long time, during which prices for most things appear to skyrocket. In 1987, a gallon of milk was about $1.07 and a gallon of gas was about 90 cents. Today, a gallon of milk is about $3.88 (outpacing NQ salary growth at 3.6x) and a gallon of gas is hovering around $4 (while the most recent bump is reactive to the current crisis in Ukraine and uncertainty around dependence on Russian energy, gas price hikes take the cake at 4.4x).
What does that mean in plain English? It means starting salaries, even on the top-of-market scale, have barely gone up at all. In fact, when indexed to 2022 dollars, starting salaries have yet to recover to the 2007 peak. It is this hard-to-see & easy-to-forget impact of inflation that left first-year Cravath associates in the inexplicable position of feeling very, very poor while being paid the handsome salary of $160,000 by 2015. Manhattan is one of the most expensive cities in the world, and the days of plum bonuses (to the tune of $35,000!) being handed out to first-years had long since gone with the wind. In real purchasing power, the class of 2015 were being paid less than the class of 2002 had in their first year at the firm.
Considering their bright prospects, I’m not exactly weeping for the plight of first-year associates. That said, the inflation-adjusted data plainly shows that first-year salaries have been largely rolled back from their pre-GFC levels with no signs of coming back up. With inflation roaring back, Big Law’s cousins in Big 4 Accounting & Big 3 Consulting are ramping up junior staff salaries, and $215k brings first years basically in line with Big 4 Senior Consultants and post-MBA first years at McKinsey, Bain & BCG.
So perhaps we can all agree to put this particular gripe to bed (but probably not.)
👀 A Historical Lookback to 2007 Reveals a Roller Coaster Ride Full of Thrills (Just Not Much of the Good Kind, Like You Want) 🎢
With a global plague dragging on (and on) for nearly two years now and the spectre of potential World War 3 hovering over Ukraine, many of us have feel a bit suspended in time. It’s difficult to remember pre-Covid times with any clarity, and it’s easy to assume that Big Law associate salaries have only gone up, because it would be very big news for the world’s richest & most elite firms to cut salaries.
And indeed, we’ve seen adjustments and increases to the market-leading scale four times since 2016, which seems like a lot. Alas, when adjusted for inflation, the numbers show that the real dollar value of associate salaries at all levels have taken a dip more often than not in the last 15 years. For a fuller picture, the charts below show YOY change to both base compensation and total comp (inclusive of annual & special bonuses) since 2007.
From this view, a few narratives of interest begin to take shape. Since the subprime crash plunged Big Law into lasting disarray in 2008, the associate compensation leaders have handed out “special bonuses” in 4 other years: 2011, 2018, and most recently the Covid adjustments in 2020 and 2021. After the failure of Howrey and Dewey LeBeouf, most of the Am Law 200 embraced the urgency and importance of better cash controls. Meanwhile, Big Law’s elite came to rely more and more on discretionary compensation to reward their highest performers.
After the disastrous run of 2009 and 2010, New York’s most prestigious firms began their recovery in 2011, a few years earlier than the rest of the pack. By 2014, the richest firms were ready to reset the bonus scale and by 2016, the base salary scale finally updated from the pre-crisis 2007 scale. All in all, 2007 to 2016 comprised a very tough decade for Big Law, and these years were not kind to lawyers in general and associates in particular.
Apart from depressed compensation, clients began to apply mounting pressure on outside counsel on a number of fronts: be better, be faster, be cheaper… just be more (!) of all (!) the (!) things!! (Responsive! Efficient! Commercial! Digital? Tech-savvy? Project managed? Innovative!)
With the dawning of the new millennium, the work context around associates changed drastically, albeit in less obvious and less concrete ways. In 2000, 12 billion emails were sent per day; by 2009, that number had exploded more than 20x to nearly 250 billion. Sometime within that decade, many invisible forces morphed Big Law associates into always-on-call resources. In 2022, you can take a Big Law associate out of the firm’s offices, but the motivated partner has at their disposal at least half a dozen digital means to bring the office to the associate.
In 2006, the Federal Rules of Civil Procedure was updated to codify the concept of electronically stored information, and the litigation subsegment of Big Law spent the ensuing decade in a continuing state of structural disruption: the mainstream adoption of technology-assisted review; the emergence, rise, and invasion of e-Discovery vendors; and the increasing (yet elusive) client expectation that litigation spend be brought under some semblance of budget control. Much of the blocking and tackling in these structural “innovations” fell to associates to figure out.
Meanwhile, this decade also saw the rise of the two-tier partnership and a lengthening of the already long and arduous road to equity partnership.
TL;DR? Many associates basically hated life from 2008 to 2016.
💰 But Those Bonuses, Though!
Indeed, Big Law associates suffered many slings and arrows in those years, but let us not fret over-much for their suffering. Many associates let their immense suffering and their equally immense productivity be known, and managing partners across the land heard them clearly enough, at least in 2011, 2014, 2016, and 2018:
In the many numbers presented above, there are 3 primary points of interest.
👶 Pay for junior associates (second years as well as first years) tanked super hard in 2009 and never really recovered the height of the pre-GFC glory days.
⭐ But for those with the fortitude and stamina to suffer through the growing pains, things were looking up for the mid-levels by 2014 — particularly for 3rd years.
💵 The 2014 bonus scale represents a fundamental shift in compensation philosophy that is even more emphasized in the 2022 scale. This is the year mid-level associates clawed back to the pre-GFC bonus scale, but Cravath took senior associates way over the top with $100k bonuses for 7th and 8th year associates. Bearing in mind that even within the most prestigious & elite firms, not every associate hits their billable hour target, the target compensation implied by the bonus scale represents the maximum differential between the superstars and underperformers within the same class. Like the rise of the non-equity tier, this is a structural change in lawyer compensation with far-reaching and reverberating impacts on firm culture: a fractal weakening of the bonds that hold partnerships together. Between 2007 and 2021, the pay scale from 1st to 8th year underwent severe decompression from a ratio of 1.7:1 to 5.8:1.
It is no coincidence that in the very same period, the lateral market continued to climb to new levels of frothiness and partner compensation at most firms underwent similar but even more extreme levels of decompression, culminating in the current state of play in 2022. Partner compensation ratios exceed 30:1 at a handful of Am Law firms, leading to levels of partner income inequality unimaginable in lockstep models that hover around ratios of 4:1 or 5:1. Even the oldest of the old-line lockstep holdouts are finding it necessary to stretch the high end of partner compensation bands to compete in a rough-and-tumble lateral market upturned by Kirkland’s aggressive forays into Wall Street’s most heavily guarded strongholds. See Post 218, predicting the decline of pure-play lockstep among old-line firms. See also “Cravath abandons strict lockstep compensation for partners,” ABA Journal, December 12, 2021).
TL;DR. This isn’t your father’s Big Law… it’s richer but leaner & definitely meaner.
🕵🏻♀️ What the New Scale Signifies: Mo’ Money Mo’ Problems🔎
Simply put, the new scale definitely means more money. Yes, it’s very plainly good to be a 3rd year associate at a top-tier firm. It is even more obviously awesome to be an 8th year associate at one of these firms. But what does the overall structure and texture of the new scale tell us about the expectations that will inevitably follow?
A side-by-side comparison of target comp (base + annual bonus only, excluding special bonuses) in 2007 & 2021 help us visualize the changing expectation for young lawyers at the world’s most elite law firms (and give some sense of the current state of play in the associate talent market). In the same vein, lookback to 2012 in the graphic below teases out some of the structural differences that the past decade has wrought on the associate pay scale.
🥕 The 21% bump from 2nd to 3rd year is of particular interest and in fact is the most significant structural change in the new-look pay scales of 2021 and 2022. While senior associate pay posted the largest gains as against 2007 levels, these levels benefit from the compounding effects of higher compensation starting in the mid-level years. Historically, 6th and 7th years presented high-risk points in the pipeline when associates would leave behind an increasingly uncertain partner track to competitors or to clients. In recent years, 4th year has emerged as a new fork in career pathways where associate attrition spikes to concerning levels. The spike in 3rd year pay suggests to me that firms are attempting to shore up those defection points a bit earlier. The $57.5k / $75k / $90k bonus milestones for mid-levels are enticing enough to tie departures to bonus payout dates, and perhaps heart-warming enough to help associates breeze past the first half of the following year until the next bonus payout beckons yet again.
😰 But along with the elevated mid-level pay, elevated expectations for revenue generation are sure to follow. As a rough heuristic, it’s safe to assume that Super Rich firms expect to recoup at least 3x to 5x their direct compensation costs in collections. Particularly at firms at a slightly greater remove from the apex tier of reputation and prestige, clients are certain to push back on rate increases within the next few years. Apart from the rate pressure, a corrective decline in demand is more likely than not in the next 24 months. When coupled with the fact that more corporate law departments are willing and able to move their work to lower-rate firms and where applicable, to newly available substitutes like ALSPs and the Big 4, many associates will be hard put to hit billable hour and revenue targets implied by these targets. Suffice to say that Cravath & Wachtell are doubly protected from such risks by virtue of not only their reputation but also their size. Based on recent year performance, Davis Polk, Paul Weiss, and Kirkland probably have sufficient strategic safeguards in place to avoid both pricing and demand risks, and perhaps the same could be said of another half a dozen firms. Beyond that, I suspect some headwinds are headed for the firms making aggressive moves to secure their spots in the top echelon of the Big Law pile. In a compensation scheme with a much greater emphasis on performance-based discretionary pay, I fear those headwinds will translate into increasing levels of pressure and stress for mid-level and senior associates.
💻 Most interestingly, although perhaps it is wishful thinking on my part, I tend to think that the growing role of technology in knowledge work does widen the distance between top performers and the rest of the pack earlier than in past years. As Steve Jobs famously said, the computer is a bicycle for the mind, and tech-fluent associates can score an early edge that will reap compounding benefits as they progress in their careers. While the white-shoe elite hardly ever bother with press releases about legal tech, they are nevertheless leading — not lagging — the pack in adoption of the handful of modern practice tools that are ready for prime time.
💁🏻 Clients Are Getting What They’ve Been Wishing For 🧞♀️
Client reservations in news coverage notwithstanding, the 2022 pay scale actually reflects a functioning market moving in a direction that roughly follows the public and private dictates corporate clients have voiced over the past decade.
It’s true that the 2006 & 2007 pay scale increases represent the culmination of a decade or more of very aggressive and likely excessive rate hikes. As against the 2006 scale that had been in place for since the turn of the millennium, the 2007 base salary scale reflect across the board increases of over 20% in every part of the associate grid:
Since then, however, Big Law’s elite have generally tried to steer toward corporate clients’ most vocal concerns. Following many instances of imprudent discounting in 2008 and 2009, most law firms have tread very carefully around annual rate increases, and large institutional relationships have benefitted greatly from pricing mechanics like the ever-popular volume discount and longer durations for locked-in rate schedules. While the 2016 salary scale also reflects a fairly straightforward, across-the-board lift, law firms’ experimentation with bonus scales have culminated in a fairly rational target comp scale for 2022 that faithfully reflects client wishes for conservative junior associate rates and the current supply crunch for mid-level and senior associate talent. The clear step differences across junior, mid-level & senior bands are even more meaningful when you consider that the current scale requires firms to ask clients for sizable promotion-based rate increases as young associates progress through the ranks.
In my view, the current level of decompression — as well as the pace of absolute increases in pay levels — across associate seniority bands is to the collective good. Here’s where I’ll appeal to a higher power and call upon the voice of the client.
I asked Jason Barnwell, General Manager for Digital Transformation of Corporate, External, and Legal Affairs at Microsoft, for his candid thoughts on the 2022 scale. (I also asked my good friend & frequent holder of strong, detailed, longwinded opinions Casey Flaherty. Casey helpfully replied “I don’t care one way or the other,” and he wasn’t kidding. See “LATE: Thoughts on Associate Salaries,” 3 Geeks & a Law Blog, September 11, 2016.)
More helpfully, here’s what Jason said:
This looks like a market finding efficiency. Law firms offer clients premium services. Law firms pay their people and price their services based upon their market perceptions. Law firms seem to have more work than they can handle right now and need to attract more talent so they are moving up-market on input and output costs.
Corporate customers have more work than they can handle and constrained resources. When law firms increase their rates corporate legal buyers must consider if the value of the services to be purchased align with the offered price.
I expect increasing firm rates will cause corporate legal buyers to move more of their spend to alternative models, faster. Both because of their resource constraints and their increasing need to express the outcomes of the services they produce and purchase in business value.
I am in violent agreement with Jason. The 2022 scale is aggressive enough that the coming 3-5 years will require a strategic sorting: a reshuffling, if you will, of the reputational order in Big Law. The firms matching the Cravath/Davis Polk pay scale are making big bets to maintain their standing in the highest echelon of the legal profession, and I applaud their willingness to bet on themselves. All of them are playing for the long haul, not for short-term gains, and the size of these increases ensures that the equity base is putting real skin in the game.
That said, matching the top-of-market pay scale represents nothing more than the cost of entry in the tournaments to come (albeit an exceedingly expensive cost). I fear, however, that a sizable subset of these firms have the capital to play but not necessarily the will to win or the requisite capabilities to recoup their up-front investment in talent.
🏆 Only A Handful of Firms Play to Win, and the Rest Play to Play 🎲
At the highest echelon of Big Law, the business model is predicated on two assumptions about the firm’s platform: (1) the consistency with which it can attract premium mandates from clients and (2) the consistency with which it can select high-potential candidates and turn largely unproductive first-year associates into market-leading experts within the span of a decade.
In 2022, both assumptions will be put to the test. At $415k base and $530k total compensation, prevailing market rates for senior associates are poised to break through the $1,000 barrier very soon. At minimum, what the Cravath/DWP scale ensures is that these lawyers are far too expensive for all but the most critical and complex of matters. To the extent that some less fortunate firms cave to headwinds in the face of declining demand and increasing price pressure, some of these highly paid associates will find it tough to practice “at the top of their license,” while anxious partners move down-market to fill dwindling pipelines. In this unfortunate scenario, clients will surely balk, as they should, at the prospect of paying top-of-market rates for legal work of middling complexity and middling consequence.
The demand-side dynamics will play out over the next 3 to 5 years, and the ultimate winners of the 2022 salary wars will be determined by the financial results they are able to deliver to their equity partners in the back half of the 2020s. For now, I offer a few thoughts on the supply-side of the law firm business.
In 2005, Paul Graham of Y Combinator fame published an instructive essay pondering the difficulties and rewards inherent in properly assessing the value potential of young people. (Although Graham’s essay addresses much younger talent in the context of picking high-potential startup founders among undergraduates, the entire discussion is worth your time, and with a bit of thought, highly relevant to talent development in the legal profession.)
I think few realize the huge spread in the value of 20 year olds. Some, it’s true, are not very capable. But others are more capable than all but a handful of 30 year olds. Till now the problem has always been that it’s difficult to pick them out. Every VC in the world, if they could go back in time, would try to invest in Microsoft. But which would have then? How many would have understood that this particular 19 year old was Bill Gates?
It’s hard to judge the young because (a) they change rapidly, (b) there is great variation between them, and (c) they’re individually inconsistent. Most organizations who hire people right out of college are only aware of the average value of 22 year olds, which is not that high… The most productive young people will always be undervalued by large organizations, because the young have no performance to measure yet, and any error in guessing their ability will tend toward the mean.
It is easy to decry the relative uselessness and the absolute overcompensation of first-year associates. (That said, don’t sleep on this group. In Graham’s parlance, the first-year associates at the 25 most profitable law firmis in the world are highly likely to develop rapidly and they are likely to develop into highly productive lawyers regardless of well-worn tropes about lawyer inefficiency or technology avoidance.) It is true that Big Law’s elite have historically depended on outdated proxies for talent and potential like academic pedigree, and that such hiring practices are highly correlated to the lack of true diversity, equity & inclusion in the legal profession. In other words, to the extent elite law firms have made missteps in talent, it is probably that (a) they have missed positives in failing to select diverse talent and (b) they have missed opportunities to greatly speed the pace of development of the talent they do select.
Both are real strategic drawbacks, but I fear neither are fatal. The reports of Big Law’s death have been immensely exaggerated, and the dramatic extinction of the existing Big Law order is as remote a possibility as the singularity. No matter how glacial the pace, a growing proportion of Big Law’s elite are evolving with the changing times, and they have both the war chest and the client base to build and traverse a looooooong runway to the future, while the rest of wait, patiently or otherwise.
Over the past decade, clients have been voluble in their demands for all law firms — inclusive of the Super Rich — to modernize the practice and business of law. In 2022 and beyond, I suspect a new force for change will emerge within the four walls of the firm: the next generation of associates have a real opportunity, real leverage, and real incentive to speed the pace of positive evolution of the legal industry.
So I close this post with three very sincere messages for those associates:
🎉 Congratulations on the bonanza — be sure to enjoy it! (Also, the 🥃 drinks 🍾 are always on you. 🥳)
💖 Believe in yourself — you are worth every penny.
❤️🔥 Find the courage to attempt difficult things — we are expecting great things from you.