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The pay for top US lawyers has skyrocketed so far that even the financial sector’s “masters of the universe” are raising their eyebrows.
Bidding wars for star corporate attorneys have sent recruitment offers from rivals for the biggest “rainmakers”, or profit generators, to more than $25mn a year in some instances. Even hedge funds that specialise in distressed debt are starting to object as bankruptcy law partners are charging more than $2,500 an hour, with even their supporting first-year associates often billing nearly $1,000 an hour.
Survey data compiled by headhunter Major, Lindsey & Africa shows that average pay for US “Big Law” partners has jumped from $700,000 to $1.4mn in the past 10 years.
Industry observers say they do not expect the upward remuneration trends to abate in the foreseeable future, even with the continuing slump in corporate deals in the US. At the top end, lawyers have client rosters that are filled with Fortune 500 companies and private equity firms, worth tens of millions of dollars of revenue annually.
Law firms are willing to make big bets for that kind of productivity. “If you want to make a lot of money in the practice of law, originating high billings work is the key in this world,” says Karen Andersen, a recruiter at Major, Lindsey & Africa.
The growth of the legacy private equity industry into a sprawling “alternative assets” sector that manages several trillion dollars has created demand for new kinds of lawyers well beyond a traditional generation of corporate dealmakers. So-called fund formation specialists, who help financial sponsors raise their capital, can command high fees: a $500mn fundraising can generate as much as $5mn in legal fees.
Troy Pospisil, co-founder of Ontra, a legal tech start-up backed by Blackstone, says the most demanding clients will continue to pay the rising rates for law firms on their most sensitive matters. “For the biggest deals, clients are not willing to save 30 per cent for firms not willing to run 100 miles per hour, 24 hours a day to turn in a letter of intent, which is what stands between you winning or not winning the deal,” he says.
To make the maths work, law firms are increasingly willing to do what was once considered sacrilegious: treat lawyers as individual superstars like hedge fund investors or footballers. Almost no top firms have kept a so-called lockstep structure where partners of the same “class year” or length of service make identical salaries. Moreover, most big firms have created a “non-equity” partner status to further create differentiation in pay, leaving more resources to channel to the biggest profit generators.
Some lawyers, however, point to the negative effect on culture and morale that such pay differentials are starting to bring. They add that splashy hires often also entail taking on teams of associates, adding to the costs of such external recruitment.
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As for those associates, the opportunities remain lucrative. The “Cravath scale”, named for Cravath, Swaine & Moore, which sets a de facto benchmark annually for other leading firms, last year offered $225,000 for first-year associates, with the seventh-year associates on base salaries of $420,000.
In the UK, the “magic circle” firms have been hit by US rivals — Kirkland & Ellis, Latham & Watkins and Paul Weiss, among others — building on their success at home. The UK firms have tried with varying degrees of success to pitch both their partners and associates on their ostensibly better culture and lifestyle in London relative to the US firms, even if pay is somewhat lower.
Some predict emerging technology will put the brake on the escalation in legal expenses. One law firm in the US top 10, measured by revenue, told the FT that management consultants it had hired had envisioned that artificial intelligence-powered automation and workflow tools could eliminate two-thirds of junior litigation associates, whose typical responsibility is manual document review.
While such deep reductions may not pan out, the role of junior lawyers is still set to change.
Some US states are considering following the lead of Arizona in allowing private equity and other “non-lawyers” to invest further in law firms, encouraged under its local “alternative business structure” licences. The hope is that new kinds of professional services firms, with fresh capital and innovative management, can better deliver integrated services — such as accounting and wealth management — that collectively are cheaper.
But these new business models are not expected to reach the upper levels of the industry soon. For now, top law firms will keep paying the multimillion-dollar “golden hello” sign-on guarantees.
At the same time, they are doing more homework to avoid mistakes or making poor signings. Lengthy due diligence includes questionnaires and financial analysis to carefully forecast the client revenue that is to accompany the defecting lawyers, to avoid recruitment deals going sour.
The question remains over the point at which a client in high finance will ultimately reject billing rates that are far outpacing inflation.
“It’s never good to be paid more than the clients,” says Tim Jeveons, a managing director of partner recruitment at Major, Lindsey & Africa.
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