The Perpetual Salary Wars

<<Every few years, there is a "salary war" of sorts, as law firms raise the salaries of those in their incoming classes. In response to this, firms experience a variety of effects. Since I am intimately involved in the legal industry, I believe that I have a particular degree of insight into what happens. I have been an attorney in a large law firm, have placed hundreds of lawyers, have hired numerous law firms to work for me, and have had numerous people work inside my various companies as attorneys. I would like to offer some insights into what happens when a salary war starts. I have seen certain patterns repeat themselves over the past several years, and I believe it is worthwhile to examine them.

I want to note at the outset that the results of a salary war have deep sociopolitical significance. The effects of salary wars resonate for years. In fact, it can be very dangerous to be an associate in a large law firm during a salary war. Markets operate efficiently and are always seeking states of balance. Disequilibrium can never last for an extended period of time.

1. Law Firms Start Getting More and More Work.

Generally, the first event that precedes any salary increase is that law firms start getting more and more work due to an uptick in corporate work. The corporate work that law firms do for their clients is often quite profitable for the clients and earns their gratitude. Extra corporate work generally comes about in a business environment that is growing and creating opportunity for businesses of all sizes.

When law firms start giving more and more work to outside counsel, it is generally a sign of market inefficiencies. Since law firms charge more than in-house counsel, corporations will generally seek to do work themselves (with salaried lawyers). The filtering of reams of corporate work to outside lawyers and law firms is a sign of market inefficiency.

An increase in corporate work is a sign that work will likely increase across many practice areas. For example, practices such as trademark prosecution and patent prosecution (signs of new-company formation) will also generally become busier with an increase in corporate work. Many other practice areas will become busier, as well. It is not uncommon for a surge in corporate work to throw off a surge of litigation and other types of work to other departments in a law firm.

Corporate work generates other types of work because corporate attorneys start developing increasingly close (and often new) relationships with clients, and these clients are often able to give them more and more work. This happens due to the fact that there is a healthy corporate environment, and corporations are not watching their expenses and so forth as closely. When this starts occurring, the boats of law firms will rise with the successes of their clients.

As law firms start getting more and more work, their partners start getting more requests for work than they have the resources to handle. They will give out as much work as their associates can handle. Law firms will also hold up the prospect of making partner (as they always do) as a tool to get more and more hours out of each and every associate and thereby increase overall profitability. In addition, law firms will begin hiring aggressively at the lateral and other levels in attempts to fill their needs.

Inevitably, law firms will discover that they are not getting enough of the types of candidates they want. What then ends up happening at most law firms is that in a desire to get work done (and make more money), the law firm starts lowering its hiring standards. This should be a huge warning sign—and it is a state of affairs that cannot last. Law firms are organisms and will always move toward states of equilibrium.

I remember during the hiring boom of 1999 seeing major first-tier law firms hiring laterals and others who were not even at the very tops of their classes at fourth-tier law schools. This was a sign that something was wrong. (I will discuss these sorts of hires in more detail later.)

What then ends up happening is that law firms reach stages where they simply do not want to lower their standards any more and are not getting enough good people. Law firms realize that they do not have enough people to do the existing work that they are getting and face enormous pressure to bring in more good people. Turning away clients is not easy for most law firms. They do not want to lose business and partners, so they usually begin making impassioned pleas to their superiors and stating that they need to be in firms where there are more resources to do work. (Remember, partners get paid in large part based on the amounts of business they bring in.)

At some point, some firms realize that in the race to bring in lateral and other talent, they are losing too many attorneys to other firms. Once this occurs, a "boiling point" is reached, and the decision to raise salaries begins to be contemplated.

I remember when Gunderson Dettmer was exploding in 1998 and 1999 and someone I knew received a lateral offer from the firm. (Gunderson is also the firm that started the salary wars in 2000.) The firm sent her a giant gift basket and wines and was calling her on a daily basis telling her it really wanted her to come and so forth—this is not normal for law firms. I also remember that a partner at Wilson Sonsini got down on one knee and begged her to come to the firm. I remember thinking to myself at the time that this sort of behavior was extremely unusual and that it would not last.

Finally, after a certain tension point is reached, one firm raises salaries for its associates. Not to be outdone, other firms rapidly follow suit, believing that this will attract more potential hires. Keep in mind that it takes law firms a lot of time and resources to hire laterally and hire associates in the first place. Firms are, indeed, competing for talent.

2. Salaries Are Raised: The Honeymoon Phase

Firms generally raise salaries when they are "flush" with cash. Rising salaries are not immediately all that threatening to the largest firms because there is an atmosphere of optimism and a great deal of work coming through the door. Salary increases are justified within firms as necessary to the growth of business. Increasing salaries is viewed as something that all large, competitive law firms have to do and as a source of pride within a given firm.

It is important to note that salaries are not increased for any rational reason. They are increased as a "gut reaction" and as a way of keeping up with the Joneses. Salaries are also increased in the spirit of believing that everything will always be good and that business is bountiful.

On a macro level, it is important to note that there are some deeper economic trends that govern salary increases. In most societies, economic prosperity and corporate wealth increase due to advances in productivity and means of production. For example, farming equipment and the use of animal labor at one time enabled the development of societies and cities. This was a major economic change. Other advances, such as the invention of the automobile and the assembly-line means of production, brought about great technological change. Later, the Internet and advances in telecommunications bought a great influx of wealth into IPOs and other sources of money in the late 1990s.

It was precisely this influx of money into IPOs and the optimism it created that led to the salary wars that occurred in 2000. Additionally, the corresponding exit of money from these markets led to a dearth of legal work and the crash of the legal industry.

When new technologies emerge, there is a rush of capital into them. However, most of this capital is ill-placed and simply chases after the wrong things. None of this is to say that the technologies and ideas this money is chasing after are bad—the money is simply going to the wrong people. Following a crash, the technology usually sticks around and money begins being directed at expanding the technology and broadly adapting it to the entire market. The rise of the Internet and the spread of cell phone use between 2006 and 2007—the mass adoption of these innovations—is an example. By 2006, the stock market had again reached historic highs, and more and more opportunity started being created throughout the market as a result. The law firm salary increases of 2007 are something anyone with an understanding of basic economics could have predicted.

What happens, then, when the market begins to become completely saturated with the new technology that gave rise to mass economic changes in the first place? The answer to this should be pretty obvious.

As salaries increase at firms, some other not-so-predictable results occur. While middle-tier and smaller firms may have been able to moderately (or completely) compete with the salaries that the largest law firms were paying prior to the salary increases, these same law firms are generally not built to deal with the sorts of "competition" the largest law firms are and simply cannot match their salary increases.

As a side note, the ones that do match these salary increases usually cannot afford to do so and often within a year or two merge with larger law firms to remain competitive! In addition, these smaller law firms often go out of business because they feel they cannot attract attorneys to work for them at the salaries they are paying, and partners scatter to other firms in search of greener pastures (i.e., more money) and more associates to do their work.

Consequently, the largest law firms—which have raised their salaries—begin receiving increasing influxes of interest from law students and lateral attorneys wanting to make more money. This is particularly pronounced in smaller law firms because the gap is often wider between what they are receiving and what the largest law firms are paying. Law firms that do not match the salaries offered by the largest firms are likely to lose associates.

Associates also begin to feel they are extremely valuable at this time. The popularity of message boards increases dramatically, and the chatter and banter among associates begins to get somewhat out of control. Interest in lateral opportunities outside of the highest-paying law firms increases. Interest in relocating from lower-paid to higher-paid cities increases. Dissatisfaction of in-house counsel increases as they compare their salaries to those of law firm associates.

The influx of interest in working for the largest law firms also emboldens larger law firms, which begin to feel they are very desirable places at which to work once again. Because of the heightened interest in working for them, they start believing that their existing associates are more expendable. The amount of work expected of the associates increases. Lateral movement also increases somewhat in response to the higher work demands.

Law firms begin having many more people to hire due to the salary increases, as well, which means that they increase their hiring. More associates are hired, and the firm generally grows quite rapidly in a narrow space of time.

As the firm grows, so do the profits of most of the partners. These rising partner profits become a further incentive for associates to work hard and make partner.

It is worth noting that not everyone is happy in this atmosphere. While an exceedingly small percentage of the attorneys in America earn the sorts of salaries associates at the largest law firms do, the ones who do not never feel good about themselves. Many feel there is something wrong with them and are very envious. The truth is there is nothing wrong with these attorneys—they are simply not part of the same economic paradigm.

3. The Tide Stops Rising and Reverses.

What goes up generally must come down. This adage is as true in the practice of law as it is elsewhere. As salaries rise, law firms begin aggressively increasing their overhead. Most law firms are less than a month or two away from bankruptcy to begin with, and at some point, a series of economic events causes the amount of work flowing into a law firm to decrease.

Work can slow down dramatically, or it can fall off a cliff. I remember seeing the market almost grind to a complete stop in November of 2000 after what had been a very, very brisk period of hiring. All of the sudden, it seemed, law firms simply stopped getting as much work as they had previously been getting from their clients. In other periods, slowdown has been more gradual.

While this is not a paper on economics, the fact is that the good times never roll on forever in any economy. As particular technologies reach saturation points, things have to change dramatically. This is precisely what happens in large law firms because they are so closely connected with the forces of industry around them.

When the tide stops rising and reverses, law firms simply cannot afford to pay as many associates as they used to. In addition, they have certain pressures that further complicate their situations. The largest pressure the law firms face is "You cannot take away something you have already given." Salaries, therefore, do not go down when the tide turns. They remain where they were. Bonuses may go down, however. In addition, expectations of what is required generally increase dramatically. So, too, does insecurity.

One must always remember that a law firm is a sociobiological organism and that the desire of any sociobiological organism is to survive at all costs. In order to survive, a law firm must retain the partners who are bringing in the most revenue. This is the most important thing for the law firm. Consequently, when economic patterns in society change, the law firm is very unlikely to suddenly start shedding partners who bring in income. Instead, it will do everything it can to hold onto its most economically productive partners. It will also do everything it can to eliminate its economically unproductive partners and eliminate its excess overhead of associates.

Law firms will immediately begin letting nonproductive associates go in droves when the economy weakens and the work stops coming in. The associates from the poorest schools and with the least-desirable backgrounds and fewest billable hours will generally be let go first. Associates who have made close alliances with the most productive partners usually will not lose their jobs. Corporate attorneys will generally be the very first to go. Associates in danger of losing their jobs may be moved to other floors of the building.

Corporations will begin being extremely conservative with their work once the economy starts changing course and will bring as much of it in-house as possible. Many legal projects requiring outside counsel will be put on the back burner until things change in the economy. Many corporations will simply go out of business.

Law firms will begin eliminating associates through "trumped-up" negative assessments in performance reviews and by halting lateral hiring. This pattern will continue until the law firm stabilizes. Some law firms simply "flame out" overnight like Brobeck did in 2002. The list of calamities goes on and on and on.

Many associates will leave the practice of law completely because there are not a lot of jobs in corporations, either. These associates will talk about wanting to go into alternative legal careers. Lots of families will be hurt, and bad things will happen. Message boards will begin seeing more gloom-and-doom commentary and less traffic. The number of law school applications will decrease. Hiring standards will return to what they were inside the most desirable law firms. Associates will feel more expendable.

Eventually, the pattern will repeat itself.

Conclusions

Not everyone wants to believe what salary wars mean. What happens in these "wars" is as old as the hills and the product of economic cycles that repeat themselves over and over and over again.

What I like to take from this pattern is this: "You can either work on your career or in it." The person who is a strategic player will always be watching for patterns and avoiding the negativity and other issues surrounding them before they strike.

You can also make the good work for you, and if it is your moment in the limelight, please enjoy it—just always be aware that there is something else around the corner. What you do in both good times and bad will testify to your character and what will become of your career and the course of your life.