First Signs of a New Equilibrium in Entry-Level Salaries

According to today's Am Law Daily, Philadelphia-based Drinker Biddle announced that instead of deferring its 37 incoming associates for six months to a year, it is going to institute an intensive training programs run by its partners, professional development personnel, and various firm clients.  To pay for this program, it is going to cut entry level salaries to $105,000 (from $145,000 to $160,000 depending upon the market).  Thereafter, the salaries will go to the "prevailing rate" in the spring 2010. [Query: what will that rate be?  Even it is higher than $105K, maybe Drinker is better off getting associates who self-select into its more training-intensive model.]

Frankly, this is the first sign I have witnessed of a sensible medium term strategy by an Am Law 200 law firm.  Further, this approach is very close to the associate pay models hammered out by the four FutureFirm 1.0 teams.  Remarkably, all four teams (each with four partners, three in-house lawyers, and three associates/law students) traded away the $160K pay scale for a entry level job that guaranteed meaningful training, client contact, and other perks, such as greater job security (e.g., a 3-year contract at $80,000 per year) and loan payback programs.

There are several reasons why Drinker Biddle's move could set the stage for a new equilibrium:

• Making "Better Lawyers Faster."  The real problem with the $160K pay structure is that associates become too expensive to train, at least on the client's dime.  $105,000 is more than the $60,000 to $75,000 one-year hiatus offered by several firms.  But think about it.  A firm can bill out the associates at rates below a paralegal and easily recoup the difference.   Further, the associates are learning the clients' businesses and observing partners and senior associates.  In the fall of 2010,  Drinker Biddle associates will be worth a lot more to clients than associates who took the year off.  This training is akin to the original Cravath system, which was designed to make "better lawyers faster."
• Continued Soft Entry Level Market.   With zero voluntary attrition at most Am Law 200 firms and the go-go days of Silicon Valley (97-00) and Wall Street (04-07) gone for the foreseeable future, the entry level supply pipeline is going to back up into the 2010 and 2011.   Thus, there is a decent chance that Drinker Biddle will enjoy a few years of sensible $105,000 salary structure.  In a world where revenues are unlikely to climb anytime soon, reducing costs is the only viable road to profitability.   More significantly, the lower costs and better trained workforce could become a source of long-term competitive advantage.
• Owning your Market Space.  Up until 2009, virtually every law firm in the Am Law 200 was a market follower.  Drinker Biddle lacks to the cachet to be market leader, even in Philadelphia ($605,000 in FY 2008 PPP, which is #92 in the Am Law 100).  Thus, why not be a first mover where many competitors are likely to be too snobbish and bull-headed to follow your lead?  Based on upon my observations from FutureFirm, and my discussions with Indiana 1Ls, I predict that $105K + training will be magnet for many law students.  Keep in mind, more elite firms cannot even offer a firm start date. 
• Reality is Underrated.  To my mind, it is preferable to be a so-called "middle-market" firm with a sensible cost-structure and a contented client base than an so-called top-market firm with a bloated cost-structure and clients who don't want your junior associates to work on their matters.  Am Law 200 firms can and do sometimes implode, especially when the partnership goes into denial.  Drinker Biddle, to it credit, appears to have a plan.
• $105,000 and the Six-Figure Barrier.   It is unclear to me whether $105,000 is the optimal entry level salary for a lawyer who wants the very best training opportunities to launch one's career.  I suspect the optimal figure may be lower (e.g., $80,000 per year moving up to $120,000 to $200,000 within three years).  But I do think that dropping under the $100,000 barrier may have created perceptions problems for Drinker Biddle that may outweigh any short-term financial gains--e.g., Philly rivals mimicking Drinker's strategy, but coming in above the psychologically powerful six-figure barrier.  Yet, now, if some firms dicker around at $115,000, Drinker can move to that number next year with zero lost in market credibility, said figure being the so-called "prevailing rate."

Arguably, Drinker Biddle is the first Am Law 200 firm to not "waste a crisis."  It will be interesting to see how other firms respond.

Comments

[Cato Renasci]

This is actually probably based on the way some of the "white shoe" Philadelphia law firms functioned before World War II. When I was a junior lawyer in New York, a then Simpson Thacher partner, Rick Dicke, recounted that after having graduated as a scholarship student from both Princeton and Penn law school just before the war, he was hired at a major Philadelphia firm. Money was never discussed. He said he was a farm boy from Montana, and he assumed that was how things were done.

After several months, he had received no pay. Being married and in somewhat straightened circumstances, he made an appointment with his mentor. The meeting went more or less like this, as he told it:

RD: Is there something wrong with my work?

Partner: Oh, no Rick. We're all very pleased with your work, and you get on with everyone - clients, partners, and the staff. Why were you concerned?

RD: Well, I've been here almost six months, and I've yet to be paid anything. As you know, I'm not independently wealthy...

Parter: (interrupting) Rick, the partners understand. The decision not to ask you to pay us anything during your first two years was unanimous.... You do realize that all of the other associates pay the firm during their first years.

He then recounted that he found through a classmate that Simpson Thacher & Bartlett might have an opening, wrote to them, interviewed, and went to work in New York within a fortnight.

I don't know when that changed, but I suspect it was after WWII.

[Paul]

I think this is a step in the right direction for law firms. Still, I don't understand why firms hire 1st years at all, when they can hire 3rd year associates who are much more knowledgable and typically more profitable for the firm?

(Disclaimer: I am a 3rd year associate).

[Max Kennerly]

As an associate in the Philadelphia region, let me note that the $105k is an essential element to keep the people within the confines of the corporate law firm system. A substantial number of non-AmLaw100 firms here start at $100k, and a huge number start at $80k.

If Drinker offered $80k, the most talented employees would pass it up for similar pay at firms offering far more interesting work to associates, faster partnership, and better lifestyles.

Thus, I'd be surprised if any corporate firm was able to go lower than that without destroying their talent pool.

[Duane]

Interesting model. I think the question above is key: how to keep the 3rd (and especially 4th & 5th) years in whom the firm has just invested so much from leaving.

I think the answer is something that has been posited by legal empiricists before on the opposite end of paying less than market to 1st years: pay more than market to the more senior associates. If 1st and 2nd year associates are currently overpaid, 4th, 5th and 6th year associates are probably underpaid for the value they contribute to the firm (especially the training of juniors).

If those using this model pay more than market to senior associates (who are huge profit centers and likely to *better lawyers faster* under this model) they will make it more attractive for them to stay.

(Of course there are other issues like natural advancement/attrition which would still have to be addressed)

[will]

this model would work fine . . . except that, how will drinker keep the people they've trained from jumping in 2 years to "prevailing rate" biglaw firms if the market picks up?

even if their lower billing rate covers the gap between 105K (what they're paying to work and train in biglaw) and 70K (stipend that others are paying to not work in biglaw), will it cover the full 105K?

if not, will drinker end up subsidizing the training of Dechert, Morgan and Ballard's new 3rd year laterals in 2011? although, of course, drinker could match those offers, one supposes.

[Alex]

One consideration is that firms can now distinguish themselves based on salary. There's a possibility that Drinker will lose out on "top students" who elect to go to the higher paying firm despite the greater risk they may lose their jobs. I wonder if Drinker factored this at all - or figures there really is no distinction among 1st year associates, no matter how well they performed in law school.