Tuesday, July 29, 2008

ABA Journal Reports Possible
Implosion of "Cravath System"
of Big Firm Hiring

On July 22, the ABA Journal website had an interesting article, by Debra Cassens Weiss, about the pressures large law firms are experiencing and the disparities among law school graduate salaries. For the full article, go here.

"A chart showing the salaries of 2006 law graduates illustrates a striking finding: The bulk of new lawyers are almost evenly divided into the haves and the have-nots.

William Henderson, a professor of Indiana University School of Law, sees a connection between the salary distribution and the possible demise of the “Cravath system” of hiring by the big law firms.

Law firm salaries of 2006 grads had a “bimodal distribution,” meaning that salaries placed on a graph were clustered around two peaks, NALP figures show. While the median salary was $62,000, about 27 percent of full-time law graduates were earning $40,000 to $55,000 a year year, and about 28 percent were earning more than $100,000, Henderson reported on a post at Empirical Legal Studies last fall.

Now Henderson is advancing a couple theories about the market forces contributing to the unusual salary structure in a recent post at Empirical Legal Studies. One catalyst is the growth in the corporate legal services market. The other is the Cravath hiring system in which the top law firms seek to hire the highest-performing law grads from the best law schools.

Firms that don't want to be viewed as second rate are willing to pay ever higher salaries to hire these grads. Yet firms with lower profits per partner are struggling to continue paying high associate salaries.

At the same time, the struggling firms are losing some of their partners in marquee practice areas, who are moving on to law firms with higher profits per partner, he says. He identifies the marquee practice areas as white-collar crime, securities enforcement, mergers and acquisitions, private equity, emerging markets and intellectual property.

Meanwhile, partners at profitable firms in non-premium practice areas are moving downstream, he says. These less-than-premium practice areas include regulatory compliance, real estate, public finance, project finance, and trust and estates.

Firms without a good mix of premium practice areas will find it difficult to stick with the Cravath model, he concludes. “In other words, for many large law firms, the wheels of their hallowed business model are falling off.”

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