Major American law firms have embraced not just the business of Wall Street but its ethos, for better and worse. On Thursday, Cooley, a large American group with $2bn of annual revenue and a significant presence in dealmaking and in Silicon Valley, said it was firing more than 100 staff including lawyers and support workers. Cuts elsewhere loom.
Job cuts do happen in the legal industry. But this downturn comes at a unique moment. Law firms thrived like never before in 2020 and 2021 as mergers, Spacs, junk bond financings and the like surged during the depths of the pandemic. Revenues for the top 100 firms, according to American Lawyer, went up 15 per cent in 2021 to more than $100bn.
Legal groups eagerly staffed up to fill the demand and paid top dollar to recruit associates and partners. As a result, wages have soared. A first-year junior lawyer’s base salary has reached $200,000.
Today law firms resemble football clubs, or worse, hedge funds and investment banks. Up-and-coming legal eagles such as Kirkland & Ellis have aggressively poached partners to build top-notch practices quickly.
This differs from the legacy elite firms such as Cravath, Swaine & Moore where “lockstep” pay policies remain generous. That can mean big producers are underpaid relative to their contributions, rewarded instead by the security of a lifetime of multimillion-dollar annual salaries and a generous pension scheme.
This year, the IPO and Spac markets have essentially shut down along with issuance of junk loans and bonds. Even if M&A volumes have been slightly more resilient, the glory days of 2021 will not return anytime soon. An important question for managing partners at law firms will be how much of their cost bases are fixed versus variable. Capital trapped in pay guarantees and debt from recruitment drives will then sting. The potential for more mergers among the lawyers who advise on them is there.
What separated law from its clients in high finance historically was a commitment to a professional ethics canon and a more paternalistic work culture. Lawyers have seen the bankers and financiers sometimes make tens of millions of dollars each year and wonder why they should earn so much less. Unfortunately, with the leap in lawyer pay scales must follow a risk to job security which their clients have long endured.
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