Elite Biglaw Firm Cuts Base Salaries, Blames Coronavirus

It was just six months ago Elite Biglaw that associates at Cravath, Swaine & Moore announced they would be foregoing their annual bonuses in exchange for higher salaries. But now the famously generous firm is taking that back—at least if you’re not one of its star associates.

The backstory on the Elite Biglaw

Cravath Swaine & Moore LLP is an Elite Biglaw firm that has been around since 1819. The prestigious firm is based in New York City and specializes in high-end corporate work. Recently it was announced that the partnership had reduced base salaries for new

lawyers by $10,000 to $190,000 and limited partner compensation by 20%. One of the few explanations given for this measure was to contain a possible contagion from a new virus called coronavirus.

A law associate who joined the firm last year explained how they can get away with these types of salary reductions: I don’t know how much money goes into their client payments on any given day.

Cutting base salaries and bonuses (subtracting)

The virus is making its way across the globe, with New York-based law firm Latham & Watkins confirming two of its employees have been infected. Elsewhere in Europe, a spokesman for City law firm Herbert Smith Freehills has confirmed at least two people working there had contracted the virus. Even lawyers at Dutch law firms were not immune.

A Dutch lawyer who came back from Canada caught it, said a spokeswoman for commercial litigation specialists VDZ Utrecht in the Netherlands. She’s now in hospital.

The contagion has already disrupted one London arbitration court case that had to be postponed when the lead lawyer became unwell due to an illness related to the coronavirus.

Raising associate headcount (adding)

Now that the dust has settled on the summer associate class of 2017, it’s clear that a major restructuring was taking place at Elite Biglaw firms all over America. What we have now is a document handed to every law student in America right before they graduate.

It lists available jobs and salary ranges for these respective jobs. The most notable change to this list is the elimination of salaries under 150k for first-year associates–this change took place at many of the top-ranked firms like Sidley and Skadden Arps. Notably excluded from this list are Clifford Chance in London, Shearman & Sterling in New York City, and White & Case LLP in New York City.

The justification

A recent internal memo from the firm of Davis Polk indicates that associates may now be making upwards of $190k starting salaries. To our dismay,

this is not because the firm is cutting down on hours for its employees or Elite Bigla And eliminating the typical brutal work day for these hard-working individuals. Rather,

it has come to light that in what may have been an attempt to save a few pennies in salary costs at first glance, Davis Polk altered its compensation package so that base salaries are now just under $200k/year.

If you take into account overtime and bonuses (see Internal Memo), you can quickly see how this affects Davis Polk associates’ pay.

Calculating profitability (difficult to calculate)

Often hard to calculate the profitability of a company because of the many numbers that factor into the equation. However, there are various models for businesses such as industry averages or statistical figures related to a company’s costs and revenue.

One is the EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) model. This particular Elite Biglaw formula tells how much money a company has at its disposal from what it made in total sales minus any costs associated with product or service production and minus any interest paid on money borrowed.

As with all models, it is never 100% accurate but can help determine if a business will be profitable. There are many different calculators available online that can provide information about various aspects of business economics for free to help anyone get started.

The current market

Part of the fear of taking a leave of absence for some is that Elite Biglaw will fill their spot with a more junior associate. And even if you think you’re safe from being replaced, the market has already taken care of that: the number of associates going into private practice jumped by 43% between 2007 and 2011 (according to NALP).

Further shrinking our leverage is the fact that since 2001 legal assistant jobs have grown by 18%. This might sound bleak–especially considering many smaller firms operate on a partnership structure–but there are reasons to be optimistic.

For one thing, there’s plenty more room in law school as long as we maintain an affirmative action policy for women and minorities. Furthermore, technology and globalization continue to create new opportunities for lawyers who can compete in this space.

Keep browsing Law Scribd for more updates.