The Two Forces Raising Rates and Compensation

April 27th, 2009 by Jim Cotterman

I discussed the strong alignment of associate billing rates, the time value associates generate and the compensation paid associates during the recent Altman Weil Webinar, Financial Strategies for the Current Economy.  In fact, the correlation is so strong that during those associate years one can explain 92% of the variability in associate pay looking only at time value as I mentioned in my 4/9 blog post.
 
During the presentation I also used the analogy of this progression as being driven by two forces — the elevator and the escalator.  The elevator is the general rise in rates and compensation that law firms have traditionally engaged in year-after-year for the past three decades.  Generally each year the starting salary for new graduates is adjusted upwards.  The exceptions have been during and immediately after recessions.  But the competitive forces of supply and demand usually take hold and the elevator rises again.  Once the starting salaries are set there is a ripple effect throughout the associate ranks with each class increasing to maintain the lock-step progression so entrenched in associate pay programs.  The same holds true for billing rates.  Each year law firms generally increase rate schedules usually for at least at the rate of inflation or a bit more.  The billing rate schedules largely resemble the lockstep pay programs in that each year of additional experience garners a billing rate higher then the last.  Thus the elevator lifts all upward.  It is a perfect description of inflation adjustments.
 
The escalator effect is the progression as one gains experience.  The first year associate becomes a second year associate.  Her rate and compensation increase simply with this passage of time and the accompanying increase in experience.  The escalator is the lockstep program.
 
In almost all years the associate benefits from both the elevator and the escalator.  First  there is an increase because the firm says : “Inflation was 3% last year and our costs have increased — rates must go up 5%.  And we must increase our starting salaries - another 5%.”   Thus the elevator ride up.  Then the associate gains experience  –  the escalator –  and she benefits from the pay differential in the lock-step program for 2nd year associates.
 

This entry was posted on Monday, April 27th, 2009 at 11:24 am and is filed under Economics, Associate compensation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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