From Stagnant Wages to Mass Layoffs, Recruiters Ponder Worst- (and Best-) Case Scenarios of Inflated Hiring Market

Now that many Big Law firms have matched Cravath, Swaine & Moore’s associate pay scale, announced late last month, numerous recruiters and legal industry leaders wonder what the result of inflated associate compensation will be if demand drops off from an unprecedented 2021.

Recruiters and law firm consultants say the current legal talent market continues to be active for associate and partner placements as they relocate upon collecting their bonuses. However, many say there are signs that firms are reining in the freewheeling spending on talent that characterized 2021 recruitment at its height.

If demand doesn’t keep pace with 2021, Big Law firms, which have invested heavily in poaching laterals to meet the demand for legal work in the past two years, could find themselves at overcapacity and overpaying for associate talent, while nonequity partners and counsel are increasingly finding themselves getting paid less than their associate counterparts.

California-based recruiter Larry Watanabe said professional service industries such as law firms and headhunters typically drag behind the overall economy by roughly six months. He said even in the midst of geopolitical conflict and unstable markets, firms have historically ramped up recruitment, but “when reality sets in and things slow down you have a different situation.”

“We know these times are going to end. It’s not a matter of if but when,” Watanabe said. “I don’t see any way around layoffs. I don’t see demand for legal services in the past couple years going forward. [Firms] will have to trim the ranks and do whatever is necessary to maintain profitability.”

Watanabe said if demand falls off, firms are going to reassess what to do with lawyers they’ve hired to work remotely and ensure that their leverage supports profitability, as pre-pandemic costs associated with being in the office come back.

Valerie Esposito, a Pittsburgh-based headhunter, agreed, saying an economic downturn could also result in less hiring and stagnation to compensation and “taking a hard look at if there is any deadwood.”

“We’ve heard in certain situations that if the economy goes south, there will be salary reductions and layoffs at the senior associate and nonequity partner level,” Esposito said. “There’s always situations where if the work slows, how many people might be on the short end of the stick if they don’t have work of their own to keep themselves busy.”

Early Signs of a Slowdown

Law firm industry observers say the changing use of bonuses is one sign that law firms are pulling back on associate compensation spending.

“Sign-on bonuses may be leveling off,” said Brad Hildebrandt, a Philadelphia-area consultant working with Am Law 100 firms. “Part of that is actually firms are getting talent they want and new law school students coming. Law school enrollment was down a few years ago, there will be more recruits in the market a year from now.”

Hildebrandt said there’s no guarantee that the demand for legal work will keep pace in 2022. While there’s no indication of demand dropping at the moment, he said associate salaries may level off this year, and bonuses could be less.

Signing bonuses for associates are a “new phenomenon” of the talent wars that commenced in the last two years, according to Hildebrandt. But during the pandemic-era salary wars, according to New York-based recruiter Matthew Moody, associates have come to expect signing bonuses on making a lateral move.

Yet, anecdotally, Moody said, he’s seen firms recently offering less in signing bonuses. He said this could be indicative of the market overall, or that certain Am Law 50 firms are conserving financial resources, knowing that signing bonuses are going to continue to be a useful tool in recruiting.

In any case, he continued, signing bonuses are “here to stay” as a means for firms to offer a competitive edge to candidates.

“I have seen firms pull back on signing bonuses and have seen those firms be less competitive than firms that are free-spending on these bonuses,” he said.

Jennifer Leonard, a professor at Penn Law who researches the future of the profession, sees signs that the lateral market is starting to cool as society and businesses emerge from the COVID-19 omicron variant. And as the many associates who joined their new firms during the pandemic make their way into the office, “the cultural challenge of absorbing so many laterals” will be “huge,” said Leonard.

As firms deal with this influx of new hires, Leonard thinks there will be some stabilization in the talent wars. Yet talent retention challenges will persist, exacerbated rather than relieved by recent associate salary hikes.

Consecutive salary hikes for associates have led to salary compression among the various ranks of lawyers—associates, counsel and nonequity partners—and some junior partners will no doubt be disgruntled that their associates are making as much as them, if not more.

“If you’re a young associate and you sense that irritation or tension from people who are above you, that contributes to the well-being challenges that new associates face when entering private practice,” said Leonard, adding that receiving such high starting salaries straight out of school also often leads to anxiety among new lawyers who feel internal pressure to perform, even while they are still learning how to be a lawyer.

Ultimately, said Leonard, salary compression and associate well-being can lead to retention challenges for law firms that rely solely on salary as their biggest draw for talent. And if talent retention continues to be a problem, the bidding wars may start up again.

Continued Growth on the Horizon

With all the talk of an impending burst of the talent market bubble, some experts and industry observers take a different view.

Mary Young, a consultant at the Zeughauser Group, points out that from a purely macroeconomic perspective, there really isn’t any reason why demand for legal services would fall off for any considerable amount of time, and therefore bring the talent wars to an end. Long term, she said, even a dip in demand would eventually be corrected, leaving firms that downsized needing to ramp back up again.

“Businesses need to grow, for all kinds of competitive reasons. Law firms need to pay the talent so that the talent can do the work and bring in the clients. It’s a virtuous cycle,” said Young, noting that over the past few decades there has been a significant increase in not only lawyer numbers generally, but also demand for legal services. “That’s the way this industry works, and it is a growing industry that is increasing in profitability.”

Young said she does not claim to have a crystal ball to tell her how the legal market may perform over the next few years, but anticipates that the trend line for demand in legal services will only rise over the long term. And that means associates will continue to be high-demand assets.

“Sometimes I get the impression that people think this is only about morale and keeping associates happy. That’s all important, but it’s also important in the context of a law firm being a business,” Young said. “Your talent is your most important asset. It makes good business sense to keep them happy, and salary is one component of that.”