With underwhelming bar passage rates just recently released from New York and other states, coupled with the rapid growth of Am Law 200 firms, we may see a reduction in talent in the market for associates.
As long as the market remains strong enough, the good news for some is that we can expect to see a bump in associate salaries in 2016 or 2017. To put it directly, we believe associate salaries in the near future will increase to $185,000 for first-years among the elite firms. The better question is which firm will move first? Irell? Cravath? Wachtell?
Though bar results are still trickling in, almost every state reported has significantly lower passage rates than previous years. This is not surprising as July’s multiple-choice section saw the worst results since 1988. The issue most likely starts with law schools that areloosening their admissions standards to counter the decline in applications.
Additionally, many law schools are resorting to transfers to boost their student body without affecting their U.S. News and World Report ranking. Because the ranking factors only first-year applicants, law schools can reap the benefit of lucrative transfer students while maintaining their status quo in the rankings. Georgetown was an especially prominent patron of this system. One-sixth of its 2L class was composed of transfer students.
The bar exam serves as an effective barrier to unprepared lawyers, but declining passage rates and law school attendees could have a significant impact on Biglaw in the following ways:
1) Leverage: The Am Law 200 has increased 30% in size over the last 10 years. Most of this growth is coming from the partner ranks; over the same period, leverage has dropped about 15%. Should law school attendance and bar passage rates continue to drop, megafirms with high leverage are going to find it increasingly difficult to maintain their leverage.
2) Bill Rates: As rates continue to increase, clients have continually pushed back, increasing the use of AFAs. Some clients are completely unwilling to pay first-years to service work, reasoning that they are paying for their job training. This concern is overstated, but it may get more vocal if clients are not confident that the incoming crops of first-years are comparable to past classes. Firms will likely counter with further blended bill rates to assuage client fears.
3) Firm Growth: Should associates continue to become more scarce, the growth craze that has gripped the Am Law 200 over the last 10 years will be difficult to maintain. The most viable move for large-scale growth could become mergers or acquisitions. Altman Weil reports that 2015 is setting a record pace for law firm mergers and acquisitions.
4) Increased Salaries: If future associate classes seem comparatively barren to current standards, we should see an increased competitiveness for lateral hiring. Demand for new hires already outpaces supply, and firms will have to adopt new business practices to make their firm attractive to lateral candidates. In other words, the elite firms will spike compensation for associates to attract the limited supply of best talent. These costs will probably get passed on to the client in higher bill rates but only for those firms sourcing the mega multibillion-dollar mergers and bet-the-company litigation. For the remainder, we will continue to see a gap in pay and talent.
The market is potentially on the verge of a major shift. We are happy to discuss how firms can optimize their long-term hiring strategy.