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Competition for top associate talent impacts profit levels

According to recent reports, the competition for first-year associates has escalated to the point where law firms are noting a dip in profit margins. In a report from Citi Bank Private released this month, the financial performance of firms across the United States and Europe is under significant strain. The crux of this pressure stems from the increase in first-year associate pay that came about earlier in the year.

Back in July, Cravath Swaine & Moore increased its starting salary for these professionals by 11% - up to $180,000 – as a means of attracting top talent. This move has arguably reignited a battle in associate pay that hasn’t been seen since around 2007. As a result of this hike, firms across the states and Europe have, in turn, increased their offering in order to ‘out-do’ the competition and attract these highly-sought-after entry level skills.

While many elite firms have absorbed these costs with little concerns, the picture isn’t the same across the board. According to the Citi report, these salary increases are causing expenses to grow fast across the industry, in many cases, faster than revenue growth itself. As a result profit margins are being severely impacted.

Commenting on these results, David Altuna, a senior vice president and client adviser in the Citi Law Firm Group, explained “Lawyer compensation expenses went from 3.0 to 4.1%. That’s the growth. To really zero in on that you have to look at headcount. Well, headcount was up 1.8% at the halfway mark and it came down to 1.6%. It wasn’t an increase in headcount that drove compensation growth and so we think it’s the associate compensation increases.”

As Altuna went on to clarify, the impact this hike in pay will have on end of year results is significant, “It looks likely that 2016 will come a bit short of 2015 in terms of profit and revenue growth, and we can point to a lot of factors — the change of administration, the implications of Brexit, associate compensation.”
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