Junior capital

It has been a good year for associates at US law firms. At the beginning of the year, Simpson Thacher & Bartlett raised the bar for all other law firms when it raised the base salaries of its first-year associates by $15,000 to $160,000. All other associates – lawyers who typically have recently graduated from law school but not yet made partners – also received pay hikes. Now, as the year comes to a close and bonus season approaches, law firm associates are again in for another treat, this time initiated by Cravath, Swaine & Moore.
The move by Simpson Thacher, the long-time law firm of Kohlberg Kravis Roberts and The Blackstone Group, was swiftly followed by a pack of law firms. After Simpson Thacher’s announcement in January, major law firms – many who are the who’s who in private equity legal advisors in the US – “matched” Simpson Thacher’s salaries of its associates.
These firms include Cadwalader, Wickersham & Taft; Cleary, Gottlieb, Steen & Hamilton; Clifford Chance; Davis, Polk & Wardwell; Debevoise & Plimpton; Fried, Frank, Harris, Shriver & Jacobson; Kirkland & Ellis; Proskauer Rose; Shearman & Sterling; Skadden, Arps, Slate, Meagher & Flom; Sullivan & Cromwell; and Weil, Gotshal & Manges.
Private equity has been both a boon and a bane for these major law firms. The growth of private equity activity has been driving much of the need for legal advisory work, from fund formation, transactions, IPOs, leveraged finance, litigation, tax, employee benefits and compensation, to local regulatory knowledge. Many law firms now regard private equity as the cornerstone of the corporate department’s growth – and profits.
At Simpson Thacher, its relationships with KKR and Blackstone alone reportedly contribute 15 percent of gross revenue. Richard Beattie, Simpson Thacher’s M&A and leveraged buyout key man, increased his rate to $1,000 per hour recently.
But private equity has also been luring associates away from law firms as they formalize the legal function in-house and to manage the relationships the private equity firm has with external legal counsels (see page 11 for best practices in managing relationships with external legal counsels).
Many general counsels, as in-house lawyers are known outside of law firms, are former associates who have worked at law firms for four to five years before being poached by private equity firms. Law firms have been suffering from high turnover as associates leave for higher salaries and/or a better quality of life at other organizations.
With associates already enjoying base salaries of $160,000 for first year associates and up to $290,000 for ninth-year associates, it will be a happy year end. When compensation leader Cravath announced it will pay special bonuses ranging from $10,000 for first year associates to $50,000 for senior associates, again major law firms followed suit, including Debevoise & Plimpton, Simpson Thacher and Sullivan & Cromwell. These bonuses come on top of year end associate bonuses of ranging from $35,000 to $60,000. Happy holidays, indeed.