A new report on the first three quarters of 2016 compiled by Citi Bank Private has uncovered signs of the strain on financial performance that has resulted for many of the firms that lifted their associate pay scales earlier this year. Cravath, Swaine & Moore’s decision to hike its own first-year associate pay to $180,000k in July sparked similar moves across the United States and in Europe, as firms scrambled to stay competitive in the fight for early-career talent.

Pressure on profit

However, while the most elite firms have managed to absorb the additional expense without too much difficulty, the story is different elsewhere. According to the Citi report, many firms have failed to match the growth in compensation expenses with equivalent growth in revenue, placing profit margins under pressure. Citi Law Firm group senior vice president and client adviser David Altuna explains: ‘Lawyer compensation expenses went from 3 to 4.1 percent… [while] headcount was up 1.8 per cent at the halfway mark and it came down to 1.6 per cent. It wasn’t an increase in headcount that drove compensation growth so we think it’s the associate compensation increases.’

Source: Bloomberg News