Thursday, November 5, 2009 Article On Where Salaries Are Headed

There's a good article today at about the direction that associate salaries are headed in the near future.  (Update: It's also on ATL.) Interestingly, the article mentions that 55% of the participants in a recent online seminar viewed the salary cuts as only tempory - that might be a ray of hope.  However, the consultants were adamant that even further cuts would be necessary.  See how much and some other interesting nuggets after the fold.

One of the quotes from the article was:
"They probably should have set pay back a decade, to 1998. That's what I was expecting," he said. "This story may not be over yet."  In 1998, Atlanta's big firms paid starting salaries of $72,000.
Well, in our earlier post considering whether lawyer salaries rose from 200-2008, we previously used this calculator to determine the real monetary worth of past dollars in today's dollars.  Using the calculator, we find that $72,000 in 1998 is worth around $100,000 in 2008 dollars.

Here's a list of the most recent reported salaries for large firms in Atlanta.These numbers most likely don't reflect the most recent pay cuts at some of the firms and are probably better taken as an indication of what pay was at its peak.  It looks like some of the big firms had raised their Atlanta pay to the top rate of $160K, but it looks like the more accepted number in Atlanta was $130K.  One of the firms on th list is Jones Day which appeared to offer a salary of $130K at its peak.  However, from this article, we can see that Jones Day was offering $70K to start with a $4K singing bonus in 1996.  That $74K in 1996 was worth around $110,000-$120,000 in 2008.

Another interesting aspect of this article is that it claims that law firms have been able to raise their rates at 1.3 times the rate of inflation for the past two decades.  That's a pretty bold claim.  Mathematically, assuming a 3% inflation rate over the last 20 years, billing rates would be up about 80%.  However, raising billing rates at 1.3 times the rate of inflation every year for the last 20 years would mean that billing rates are up 115%.  That's a 35% difference.

Once again, our friend the calculator can help to put this in perspective.  We are going to focus on the CPI numbers in the calculator because that's what commentators are usually referring to as "the rate" of inflation.  One comparison that we can make is the first year lawyer fee per hour in 2008 as compared to 1998.  (Although the article claims 1.3 over two decades, I don't know the starting billing rate in 1988, but I do remember it in 1998).

Let's say that one had a billing rate of $150/hour in 1998.  Using the calculator to determine CPI inflation, we find that the equivalent rate in 2008 is about $200/hour.  (However, using some of the other methodologies to determine the rate of inflation yields rates as high as $246/hour.)  Lawyers - you can run this calculation to perform a comparison at your own firm.  From those that I have discussed these numbers with, it looks like billing rates did outpace the CPI inflation, but not by 1.3 times - more like 1.1 times.  Of course, that's a comparison based on CPI inflation, which is not the most reasonable inflationary measure to use in this situation.

Finally, note that the article is written from the point of view of consultants that are trying to sell their services to law firms in the firm's efforts to get work from large companies. Consequently, the reader should be aware that they may be trying to overstate their importance and the scope of the changes required because 1) it makes their service appear more necessary, and 2) it dampens firm's expectations so that they look like heroes for getting moderate results.  Frankly, I think that they are overstating the salary decline.  However, from a law student point of view, I think that there will be fewer jobs that will be offered the top salary, even after the decline.

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