Despite Compensation Cost Increase, Law Firms See Rise in Profits

2020 treated law firms well, as the surge in COVID-19 related work led to record profits at many of the nation’s largest law firms. At the same time, these firms have had to increase paychecks to keep up in the constant struggle to recruit and retain talent. Nonetheless, higher compensation costs put little dent in profits.

The Pandemic Boosted Law Firm’s Bottom Lines

Initially, it appeared as if the pandemic would cause significant economic disruption for law firms. However, it had the opposite effect. Clients hired law firms for a wide variety of matters, as they needed help in dealing with the pandemic. In addition, COVID-19 prompted numerous business deals and litigation. All of this added up to bountiful work for law firms. Remote work boosted these firms’ bottom line, with workers at home lowering their overhead costs. Many law firms moved to cut costs when the pandemic started, in anticipation of a slowdown in business that never happened. They reduced staffing levels and reduced compensation, only to reverse course later in the year. The factors that led to a banner 2020 are still in place, and law firms’ revenues continue to increase.

Rising Law Firm Profits Led to Salary Hikes

Strong performance usually leads law firms to raise salaries for associates. While the overall salary structure increases for firms because they almost all match the hikes, law firms need to remain competitive for attorneys. This is on the associate and partner level. Some firms try to gain an advantage over competitors by raising salaries to the point that other firms may struggle to match. 

Law Firms Will Need to Compete for Attorney Talent

Large law firms raised salaries above the $200,000 level for first-year associates. However, this did not noticeably impact profits. First, law firms had more than enough work to absorb these costs. Revenues increased by double digits for many firms. Second, law firms find a way to raise expectations from attorneys when they are paying lawyers more. 

While law firms reduced expenditures on things like staff and attorney recruiters, this is expected to change going forward. Once again, law firms will need to increase expenditures, especially as lawyers return to the office. Attorneys are in demand, and firms will compete for talent. In other words, while revenues will remain strong, there may be some pressure on bottom lines.