Law firm deal and case volumes have grown dramatically in 2021. The increased demand for legal services has reshaped the law firm compensation and hiring landscape, with firms struggling to retain and expand their mid-level associate ranks. Law firm associates are now in the driver’s seat, with many new factors to consider.
Increased Demand, Increased Hiring
The demand for legal services, particularly for Am Law 200 corporate transactional practice areas, has been unprecedently strong this year. As the Economist recently noted, “Nearly 16,000 {M&A} deals involving at least one American party have been announced in the first six months of this year, roughly half as many again as in the same periods in 2016–20.” U.S. M&A deal value in the first half of 2021 was 264% greater than the first half of last year according to Forbes.
The deal influx has sharply increased demand for junior through mid-level law firm corporate associates. According to Leopard Solutions data, there were 1,375 lateral corporate associates hired into Am Law 200 firms in the U.S. in the first seven months of 2021. This is a 163% year-over-year increase compared to the first seven months of 2020, when just 523 U.S. lateral corporate associates were hired into Am Law 200 firms in the U.S.
Base Compensation Increases Have Not Been Uniform
In an environment of exceptional demand for junior through mid-level associates in busy transactional practice areas, as well as for commercial and patent litigation associates, firms have had to make changes to recruit and retain top talent. Base compensation is on the rise: the new associate market salary scale ranges from just over $200K (first year) to $365K (eighth year).
The salary scale increase has boosted compensation across the board. Notably, some previously below-market firms are moving to full market lockstep, with some firms in cities such as Atlanta instituting New York market salary scale for the first time. Large firms that remain below the current market salary scale tend to fall into three categories. Many firms have increased first-year associate salaries to $202.5K or $205K but pay between $15K and $25K less than market for mid-level and senior associates. Most of the below-market Am Law 100 firms are in this first category. The second category includes firms that are on (or slightly above) the 2018 market scale, which paid salaries ranging from $190K to $340K. A third category consists of firms that fall below the 2018 scale and start first-year associates at a base salary range of $160K to $180K.
In this new landscape, the income disparity between associates at market and below-market firms has expanded. Prior to 2021, Am Law 200 and regional firms paying below-market compensation were still relatively close to the market salary scale, often paying slightly compressed salaries for mid-level and senior associates and year-end bonuses 15% to 30% below-market. Associates at below-market firms were generally receiving base salaries in the range of $15K to $20K less than peer associates at their same year level at market compensation firms. That disparity has now widened to more like $30K to $35K. Notably, in the months leading up to the June 2021 market salary scale increase, some below-market firms had just increased their compensation to be more competitive with the previous 2018 market salary scale, only to have the market scale increase again. Factoring in special bonuses (which many below-market firms are not distributing), and market year-end bonuses, we are now looking at well over six-figure compensation discrepancies.
Admittedly, there are often some upsides to working at a firm with below market compensation, such as better work-life balance, more client contact, better partnership prospects, and/or substantive responsibility on cases and matters. However, for some associates, the compensation gap now may be too significant to justify staying. The reality is that many firms at or near the current market salary scale offer associates a reasonable schedule and the aforementioned non-pecuniary benefits.
Special Bonuses, Signing Bonuses, Retention Bonuses, and More
In this tight labor market, base salary increases are just one component. Firms have paid special bonuses to associates, ranging from $12K (first year) to $64K (eighth year). Firms are also seeking to recruit and retain top talent with a range of signing and retention bonuses, not to mention more flexible approaches to remote work.
Consistent with previous years, firms are addressing the disincentive for lateral associate candidates to leave behind their annual bonuses at their current firms. Most firms are offering true-up signing and/or guaranteed year-end bonuses totaling or exceeding the amount of lateral hires’ anticipated year-end bonuses. Firms that were previously reluctant to offer true-up signing or guaranteed bonuses are now offering this benefit out of the gate. In addition, firms are offering non-pro-rated special bonuses (first and second tranches distributed in the spring and fall, respectively). This incentive can particularly attract associates at non-special bonus firms to start on or before special bonus distribution dates. One caveat is that firms generally will not pay special bonus tranches to lateral associates who have already collected a bonus from their current firm. In other words, no double dipping.
Firms are also now customarily offering additional signing bonuses on top of true-up year-end and special bonuses. Depending on the practice area, candidate, and year level, these extra signing bonuses can range from high five to low six figures. As an industry-wide practice, this was extremely rare prior to the start of the most recent recovery in late 2020. Signing bonuses are often contingent on a specific start date in the interest of expediting support to busy practice groups. There is also usually a claw-back provision in the offer requiring full or pro-rata repayment if the associate departs quickly (typically within six or twelve months).
To retain associates in busy practice groups, firms are offering similarly sized retention bonus to some associates. The terms require the recipient to remain at the firm for a set duration, enforced through a claw-back clause. Naturally, we are also seeing more law firms making counteroffers to associates who give notice, with perks including retention bonuses and partnership promotions. We caution candidates not to entertain counteroffers for several reasons. First, a counteroffer is unlikely to address underlying dissatisfying factors, such as the scope of practice offerings or work environment. Second, there is a risk that the firm will hold the attempt to leave against associates in future promotion decisions.
Additionally, firms have adapted by adjusting work arrangements and offering partial or fully remote schedules to associates with coveted mid-level experience. Some firms are offering fully remote work arrangements for associates based in geographic markets where the firm does not have a physical office, as we recently covered in more detail. This can be especially beneficial for associates in cities with a lower cost of living, as it may offer a rare opportunity to earn New York market scale. This may represent a six-figure salary bump, relative to the market scale where the associate resides. (That said, fully remote work is still not the norm for most open associate positions, as we recently discussed.)
The current job market is particularly conducive for associates looking to relocate to another city or to upgrade to a more prestigious firm. The time frame for a move to a new city is unusually flexible, with firms being amenable to associates working remotely for a significant period (often for the remainder of 2021) as they plan their move. Associates seeking to upgrade to a higher-ranked or more desirable firm are benefitting from increased flexibility on academic or peer-firm background requirements. We are seeing prestigious Vault 30 firms hiring associates below typical law school grade cut-offs or from more regional firms, provided the associate has the right substantive experience. This window of opportunity to join a firm that may have previously seemed out of reach may narrow in the near future. We anticipate a potentially more crowded associate applicant pool when firms return to the office. Associates who prefer to evaluate firms in-person, or who favor in-person onboarding for lateral integration purposes, may enter the lateral market at that time.
While there are numerous considerations unique to each individual attorney job search, the current state of the market heavily favors lateral associate jobseekers and merits a thorough and introspective assessment. If you are interested in hearing more about the market or are considering exploring other opportunities, Lateral Link is happy to assist.
