Something that is already common in the U.S. market is that at the end of each year, the salary compensation that professionals will receive in 2024 is “leaked” and that, not so curiously, all firms reward (in terms of salary) their professionals in the same way.
The U.S. market is very unique. It is the market where the most billings are made, where there is the most competition for partners, and where competition for new associates in elite firms is fierce. For this reason it is always interesting to observe these trends, and to see to what extent, albeit on a smaller scale, they can be translated to other jurisdictions.
The situation created with salary similarity can have two explanations and several effects. First, the firm that can best pay its associates sets the trend by offering high entry-level salaries to attract the best candidates. Then, the rest of the firms match the offer to have options with the best candidates, even if it is at the cost of their partners’ profitability.
The second, alternative explanation is that this situation benefits firms by avoiding disproportionate salary inflation (the highest bidder sets the ceiling) and a flight of talent thinking they could be better remunerated under another umbrella.
Three factors influence salary setting in law firms. The first is the external offer that associates receive, which refers to the remuneration that the legal market – in general terms – pays to professionals for their work in a certain practice and with a certain expertise. The second factor is the remuneration, which is always higher than the external offer to make it attractive for candidates to join a firm. The third factor is the contribution to the firm or “utility”, which refers to the difference between the remuneration paid to professionals and the benefit they generate for the firm.
The wage war is reconfigured when, in a market with asymmetric or incomplete information (as is the case with the salary scale in firms), the cloak of doubt over remuneration is lifted and competitors match the compensation of the highest bidder; As we were saying, in this scenario, some firms can reach the highest payer without sacrificing profitability and avoid talent drain, but others, whose efficiency is not the same as that of the leading firms (which are usually more profitable thanks to their leverage) sacrifice the profitability of their partners and consequently exert pressure on professionals to produce more, since compensation should be configured as a variable function of the contribution of profit to the firm. The only thing that could be said to be true is that the partners are the ones who benefit the most.
We can draw one conclusion from this situation. The greater the maturity of the legal market, the greater the need to establish an internal compensation strategy and control indicators, to know to what extent we can compete for the best professionals in the market and what efficiencies we must achieve in order not to sacrifice the partners’ profitability.
Antonio Gómez Montoya.