Nov 16 (Reuters) – Large U.S. law firms are entering year-end bonus season after growing their revenues close to 5% on average through the third quarter, buoyed by fast-growing lawyer billing rates that have helped offset expenses, analysts at Wells Fargo said this week.
Law firm revenue grew by 4.6% during the first nine months of 2023, while net income grew by 2.7%, according to data from Wells Fargo’s Legal Specialty Group. Its survey of more than 120 firms included 65 of the 100 highest-grossing U.S. firms.
The revenue increases were driven by “some of the highest growth in billing rates we’ve seen,” Wells Fargo said. Rates grew by 7.9% overall for the surveyed firms.
Expenses grew by 5.6% during the first nine months of 2023, Wells Fargo found, compared with 12.8% growth during the first nine months of 2022.
A nine-month survey from Citigroup’s Citi Global Wealth at Work Law Firm Group had similar findings. Revenue for the nearly 200 law firms Citi surveyed grew by 4.8%, as did expenses.
The gains were not evenly shared, however. Only the 50 highest-grossing U.S. law firms as ranked by trade publication The American Lawyer saw a growth in net income–a measure of a firm’s profitability–Wells Fargo reported.
The data provide a glimpse into the firms’ balance sheets as associates wait to learn about year-end bonuses and whether they may receive a salary bump in line with increases announced last week by New York law firm Milbank.
First-year associates at Milbank will see their base pay jump from $215,000 to $225,000 under the firm’s new seniority-based salary scale, according to an internal memo viewed by Reuters. The scale for eighth-year associates will top out at $425,000.
So far, no law firm has publicly said they will match or exceed Milbank’s associate salary increases or year-end bonus, which ranges from a pro-rated $15,000 to $115,000, based on seniority. The country’s biggest law firms typically adjust their salary scales within days or weeks of one another to remain competitive.
The apparent reluctance to raise salaries is not surprising, Wells Fargo consultants said. Along with associates, any increases would extend to counsel and non-equity partners as well, said Owen Burman, a senior consultant at Wells Fargo’s Legal Specialty Group.
“It’s an unplanned expense they were not expecting,” Burman said. “They were raising rates to support all of the other costs that are increasing across the industry.”
Highly profitable law firms will have the capacity to match Milbank’s salary increases, but it might be difficult for others, Burman said. Net income rose by 5.2% for the top 50 firms, while shrinking slightly for law firms ranked 51 through 100, Wells Fargo found.
Law firms 101 through 200 in the American Lawyer’s revenue rankings saw their net income shrink by 3.7% during the first nine months of 2023, according to Wells Fargo.
“The Second Hundred really does not show any capacity to absorb any kind of additional cost pressure,” especially until they know they can collect outstanding client invoices, Burman said.
Milbank’s 2023 bonuses match what the firm gave last year. While other firms may follow suit, some may attach billable hours requirements, said Stephanie Biderman of legal recruiting firm Major, Lindsey & Africa.
Some firms have always had an hours requirement, but there may be fewer associates who qualify for the bonuses because their billable hours are down, she said.
It also remains to be seen whether other top firms will match Milbank’s new salary scale – or possibly exceed it.
“A lot of firms are in a holding pattern to see what peer firms are going to do,” she said.
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Reporting by David Thomas and Sara Merken
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