Law Firms Feeling Effects of Raising Salary Rates

November 22, 2016

In July, Big Law went through a big transition that hadn’t happened since 2007. First year associates got the big salary hike they had been craving, which was an 11 percent increase at the first law firm to announce the new salary rate, Cravath Swaine & Moore.

Law firms across the country of all sizes announced similar changes to their salary rates in an attempt to remain competitive with Cravath. With increases across the field, profits have been minimal at many law firms.

The third quarter report by Citi Private Bank for 2016 showed slow profit growths. Senior Vice President and client adviser at the Citi Law Firm group, David Altuna said, “This is the first quarter we have an opportunity to see that.” The salary hike in July has caused expenses to grow faster across the industry, eating into any profits. The top law firms have been able to handle the increase better but all law firms felt the strain of higher lawyer compensations. Altuna said, “It is quite clear that the AmLaw 50 is outperforming. They’re reporting the highest revenue growth.”

Profits have increased during the last quarter but not as much as a year ago. Overall, law firms experienced growth supported by rate growth and modest increases for demand and collections of money. Altuna explained, “We’re seeing momentum slow. I can point to two numbers: One is demand, which is measured by the total billable hours. It was up 1.8 percent at the end of the first quarter and now it’s only up 0.3 percent.”

Another factor that affected profits this quarter was the presidential election. With a new president would come new regulations so many of the firms dealing with clients in regulatory work were required to slowdown and wait-and-see what happened, especially on top of the Brexit vote.

The report is based on 188 law firms, 79 of which are AmLaw 100, 52 are AmLaw 200, and 57 additional firms.

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