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How is a New Graduate’s Salary Determined in the Economic Crisis? This article talks about ways law firms are adjusting to today’s economic conditions and salaries paid to new graduates. Of course many firms have experienced lay offs in response and others have placed new lawyers into pro bono work with their pro bono clients and reimbursed the non-profit organization for the new hire. Many creative plans have surfaced but there are other economics behind the salaries.
What is the current cost versus revenue of a new hire’s salary? It is today as it has always been. New graduates going into a law firm do not do enough billable work to cover their salary for about 3 years of their employment. The Law firm must offer completive salaries to attract the best associates and this is one reason an imbalance is created. The salary not covered by the new hire’s billable work lowers the partner’s salaries because they absorb the cost. A question for many firms is how much cost can it absorb as salaries rise each year during the current economic crisis? The new graduate salary being offered by the firm is calculated by the new graduate’s billing rate times the number of hours to be worked. Their billing rate was calculated by multiplying the new hire’s salary by two and moving the decimal point over three digits. This is how is works, if a starting salary is $60K then $60,000 x 2 = $120,000 = $120 hourly billing rate. Using this formula, 33% of the annual salary would go to overhead, 33% would be contributed to salary expense and 33% would be profit to the firm. This calculation worked fine in the 1990’s when the economy was stable but now Clients are willing to pay the rates to cover the salary expense of new hires. Today, this discrepancy is being cushioned by reducing partner’s profits.
Firms would allocate the salary budget to each department to spread across the staff based on their annual performance. This would allow the productive staff to be rewarded by increases in their work and other staff would be prompted to work harder to raise their performance ratings in the firm. New Hires are selected based on additional criteria, their experience. In this practice, Law Firms bring on new hires who have prior experience and their chances to produce profit from the new associate is more favorable and quicker than putting in the years of training it would take to build the experience level of a new graduate. Hire Temporary Lawyers at Lower Fees with no requirement to pay benefits. This strategy works well for firms who are labor intensive during the discovery process in litigation. This is one area where Law Firms can reduce their costs in the economic lull by hiring trained temporary attorneys or litigation secretaries. Increase in Salary for Cost of Living is being reconsidered in light of the economic lull.
How will firms respond to this situation now in the midst of an economic lull? Here are some new ideas that are being implemented:
Law Firms with multiple locations base salary on the cost of living for their city. Perhaps the new hire salary will come more in line from city to city rather than differentiating by location.
Salary should be deserved base on performance or merit. This would replace the annual step-up raise that is predetermined each year for a new graduate.
These methods are hoped to assist firms balance budgets as well as continue to get the best performance from their new hire staff during the economic lull. It’s time to step out of the mold and find new ways to make it work.
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