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Law firms had another big quarter, but associate pay is taking a toll

3 minute read

REUTERS/Rick Wilking

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  • Associate compensation up nearly 10% compared to a year ago, report says
  • Attorney turnover remains high despite bonuses, salary hikes

(Reuters) - Law firms saw increased demand, rates and productivity in the third quarter of 2021, but associate compensation hikes dragged on their bottom lines, a new report said Monday.

The latest Thomson Reuters Peer Monitor Index, which tracks economic indicators at large and midsized law firms, found direct expenses grew more than 7% over the past 12 months, fueled largely by associate raises and bonuses.

Many large firms increased starting associate salaries from $190,000 to $205,000 this summer and have doled out big bonuses in a bid to recruit and retain lawyers. Associate compensation is up nearly 10% year-over-year, according to Peer Monitor, which is part of the same parent company as Reuters.

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“How much of a drag direct expenses will be — that’s really going to be a question of how long firms perpetuate this idea of constantly increasing salaries,” said William Josten, manager for enterprise legal content at the Thomson Reuters Institute.

Direct expenses will keep trending up at least through the next two quarters due to recent pay increases, he said, though strong growth in rates and collections will likely keep firms profitable in 2021. The long-term impact of increased associate compensation is less clear, Josten cautioned.

Higher pay hasn’t slowed attorney turnover. Nearly 14% of lawyers at the firms tracked by Peer Monitor left during the past 12 months, which is slightly higher turnover than the third quarter of 2019 — the last before the COVID-19 pandemic. Roughly 400 more lawyers left Peer Monitor Index firms in 2021 than is typical.

“Competition for talent — as indicated by increasing direct expense growth — may have ignited in Q3 2021, but the situation may be only just starting to approach the boiling point,” the report said.

Still, there's plenty of good news for firms. Demand rose 4.4% from the last quarter. Productivity and rates were up 1.9% and 3.7%, respectively. Third-quarter demand surpassed that of pre-pandemic times.

Nearly every practice area tracked by Peer Monitor saw demand growth. Real estate led the pack with a 13.2% increase over the previous year. Mergers and acquisitions was up 9.2%, followed by all corporate work at 8.7%, tax at 4.1%, and labor and employment at 3.2%.

Litigation demand was up 2.9% over a year ago, but still hasn’t recovered to pre-pandemic levels. Intellectual property was down .3% compared to a year ago, while bankruptcy was down 12.2%, the report found.

Read more:

Law firms see strong quarter as demand hits pre-COVID levels - or better

Law firms still benefiting from high rates and lower costs as pandemic outlook shifts

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Our Standards: The Thomson Reuters Trust Principles.

Karen Sloan reports on law firms, law schools, and the business of law. Reach her at karen.sloan@thomsonreuters.com

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