<p>I think Sakky’s right…there’s a non-market component to this. Law is so hierarchical. Lawyers want to believe their firms run with the big dogs. For a variety of silly reasons, firms that don’t pay the top market rate to first-years sacrifice their big-dog pretenses. It’s one reason that salaries that make economic sense at top-5 firms are matched by top-75 firms, where they don’t make as much economic sense. If there weren’t partner pride involved, I believe you’d see a variety of salaries among firms ranked in the 50-150: some would adopt the strategy of trying to keep up with the ultra-elite, while others would adopt a different strategy of seeking out the star students at local 2nd and 3rd tier schools, who might well be willing to do offer work at a lower salary. But you don’t see that. Big firm lawyers can’t bring themselves to challenge the hierarchy that way.</p>
<p>Put another way: when things were flush, excellent national firms in big cities hired quite a number of stars from the Brooklyns and Loyolas of the world. With today’s smaller summer classes, they are doing much less of that. But the top 10% at Loyola didn’t get any dumber after the crash. They’re still Biglaw capable, and we know they’d take $105k from a Vault firm, because they’re taking $55k from non-Vault firms. But no big firm is doing that. You could call this protecting their brand, but I think it’s also pride.</p>
<p>For whatever it’s worth, the members of my summer class who made partner last year reflected the mix of law schools in our enormous class. The Loyola stars and the Harvard B students washed out at about the same rate.</p>
<p>Amazing, since just a couple of years ago law firms were getting rid of career associates, “special counsel” and the like because they were focused on serving clients rather than bringing in new business.</p>
<p>As to “career associates” or “special counsel and the like” deserving elimination, someone has to competently and efficiently do the work that the rain makers bring in. The rainmakers cannot do all of that work themselves. The work junior level attorneys do often has to be re-worked significantly. And oft times, the rainmakers cannot competently and efficiently do the work that they bring in. Senior level people, whatever their title, can often generate finished level work in 1/4 the time of junior level people, due to their experience.</p>
<p>And so, by implication, other industries apparently do not believe that top salaries attract top people. Either that, or they’re not interested in attracting top people in the first place, right?</p>
<p>I return to the examples I used before. Medical residencies pay a pittance. So either hospitals do not believe that higher medical residency salaries attract top residents, or hospitals are simply not interested in attracting the top residents in the first place. Which is it? Either way, it doesn’t seem to bode well for the quality of care to be obtained at many hospitals. {And let’s face it, if you are hospitalized, much of your care is likely to be delivered by a resident.} Similarly, science and engineering postdocs pay penurious salaries. So either universities and national labs do not believe that higher salaries attract top researchers, or they’re not interested in attracting top researchers in the first place. </p>
<p>To reiterate, the high salaries of young biglaw associates could well be understood if they actually provided significant value to the firm. But I think everybody on this thread has agreed that they’re almost certainly carried at a loss for at least the first few years of biglaw ‘training’ during which they know relatively little about the practice of law. {Heck, many of them are already being biglaw salaries months before having even passed the Bar exam and therefore not even being allowed to legally practice law. In essence, biglaw firms are paying them to study.} That rationale of training is precisely the one that is used by hospitals and universities to justify low residency/post-doc salaries, as medical residents and postdocs are still learning the true practice of their fields. But again that doesn’t answer the question of why biglaw associates are paid so highly while they ‘train’. </p>
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<p>Which again raises the question - why do the junior people continue to be paid so well, if they’re so unproductive? </p>
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<p>Which makes the situation all the more economically ironic and hence sociologically/psychologically intriguing. After all, as sallyawp pointed out, high junior associate salaries are being paid directly out of partner profits, and you would therefore think that partners would have every incentive to reduce those salaries whenever possible. After all, that is precisely what many CEO’s of large firms do: managing labor costs which is basically a euphemism for paying employees less. For them, having the highest paid employees in the industry is not exactly a mark of pride, indeed, it’s a problem to be solved. </p>
<p>So law firm partners perversely take pride in paying employees well, and indeed, will even compete with other law firms to pay employees more as a way to stoke their own egos. To that, all I can say is that surely most people in the world wish they could work in industries where firm leaders take pride in paying starting employees well. </p>
<p>Heck, if law firm partners really want to feel proud about themselves, I’m happy to help out. They can compete to overpay me, I’ll feel great about taking their money, and they can feel great about giving me their money. Sound like a deal? Biglaw partners, you can call me anytime.</p>
<p>I think the “apparent” inconsistency of market factors not purely dictating junior associate salaries at biglaw is really no inconsistency at all if you are precise about what those market factors are. Generating business at biglaw is as much about perception as it is real results. I don’t know any other professional industry that is as much skewed toward perception. This is possibly due to the actual work biglaw does.</p>
<p>Look, if a bridge collapses, its relatively easy to pinpoint if its an engineering problem or not. If a patient dies, its relatively easy to know if the doctor contributed to it. But if a merger tanks or if a firm loses a case, is it as easy to know if its a lawyering issue? What if the facts were bad? What if the assets wrapped in the merger was not what it was cracked up to be? What if you had a bad judge? What if the regulatory approval wasn’t forthcoming (and there was very little the lawyers could do about it)? Because its hard to know if the quality of the lawyering was the actual cause of a negative outcome, perception rules the day. If you hired a small firm to deal with a merger or a big case and it goes south, guess what? The lawyer gets the blame. More importantly, the person who HIRED the lawyer will be under the gun. Why did you hire a small firm for this??? Because they were cheaper??? Because they don’t charge you for junior associate work??? Those reasons are not going to fly. No. The more important the case or deal, the more incentive a general counsel will have to go to a biglaw firm, if only to cover his butt. If things go south, his excuse will be “I hired the best.” And the law firm will be given the benefit of the doubt? Why? Because they hire the “best,” don’t they? They pay the best, hire from the best schools, hire from the top of the class, etc. They couldn’t possibly have screwed up. And if they did, its something that was probably unavoidable.</p>
<p>So goes the thinking when it comes to legal services. Sakky, your analysis would be right on if it wasn’t for the fact that perceptions not necessarily linked to actual performance rules the biglaw marketplace. Its a risk management business where perceptions matter whether they lead to actual stellar performance or not.</p>
<p>“why do the junior people continue to be paid so well, if they’re so unproductive?”</p>
<p>Junior level people are productive on certain tasks, in particular, document review in large litigations, or very basic legal or factual research. Someone’s gotta do the document review and it’s usually a thankless task, you can only screw it up – not finding the good stuff in the opposition’s documents, or producing the bad stuff to the opposition by accident. But it’s boring work and completely billable (i.e., the time is usually never cut, and the law firm makes good money from that work: 3 to 1 is the ratio (they pay you 1 and expect you to bill at least 3)). Junior people usually do this work for 2 - 3 years. Many get weeded out by then at BigLaw or move on to what is believed by them to be better pastures. My advice to junior level people (< 4 years), do not make your office look like a home – it’s only an office. Don’t get plants, don’t put up too many pictures on the wall, don’t get a fish tank or a rug. I have seen it all. When you’re canned, you feel like an idiot (at least you look like one). Don’t spend the big bux you newly get on fancy cars or weekends to Bermuda. Save a bit, you might need it someday.</p>
<p>Now we may be getting somewhere, for your analysis indeed confirms not the strength of market forces but rather that of a market failure, and specifically the presence of pervasive information asymmetries. Market forces truly become effective only when all parties have complete information about quality of the good that they are buying, but in the real world, the vast majority of customers are unable to assess the quality of the good that they are buying. Certainly legal services are more complex still in that their quality is difficult to assess even after the customer has purchased them, which thereby relegates the customer to rely upon status indicators such as law school brand name status. But now this becomes a fundamentally a sociological rather than economic story, as it raises the question of why certain law schools enjoy greater status than others (status being a core sociological construct). That’s what I’ve been emphasizing all along - biglaw salaries seem to be more amenable to sociological arguments rather than market-based arguments due to the presence of strong (information-based) market failures. </p>
<p>But at the same time, I think you discount the complications inherent in other labor markets as well. The reason for the failure of numerous complex engineering/technology systems is often times extremely difficult to ascertain. For example, other than the sticky floormat issue, the reasons for uncontrolled acceleration of Toyota autos that sparked an avalanche of recent recalls are still largely unresolved, and likely mostly seem to have been caused by driver error. The quality or even necessity of numerous forms of medical treatment are opaque to the customer. Somebody is wheeled into an emergency room having been shot, the ER doctor treats him, but he dies anyway. Was that incompetent medical treatment, or would he have perished anyway even with the best treatment? Who knows? The same is true of many engineering services, especially service/repair services. If your computer dies and you take it to the shop, and they tell you that you need to replace a bunch of different parts, you don’t really know if all of those parts really do need to be replaced. And even after they’ve worked on your computer, you still don’t really know if it’s completely fixed. (And if you did know all of that, you would never have taken it to the shop at all, as you’d just fix it yourself.) One might credibly feel more comfortable knowing that an MIT engineer fixed your computer. </p>
<p>Nevertheless, you don’t see hospitals and engineering service/repair firms overpaying their new employees to provide what is largely a reputational good. In fact, like I said, many hospitals pay their new residents an absolute pittance, with no premium if you graduated from HMS rather than some 4th tier medical school. </p>
<p>But biglaw associates are clearly being paid that premium.</p>
<p>If you don’t want to hire a law firm that pays its associates a lot of money and that will likely bill you accordingly, don’t. The complaints about high junior associate salaries are really misplaced, anyway. Junior associates are a money-losing proposition for most law firms, so their salaries are really coming out of partner paychecks (profits).</p>
<p>Here’s the reality: Top law firms in NYC (and probably other places – I can only speak for NYC) paying those top salaries are turning away work. You can debate the merits of paying first year associates $160,000/year all day and all night, but I (and my first-year associate, mid-level associate and senior associate, for that matter) will be up for several more hours this long night working. Our client on this matter never questioned our billing rates because they need this work done well and exceedingly fast. The client will pay the bill (which will be a pittance compared to what they will be paying to the investment bankers and accountants on the deal) and make a ton of money on the deal we are working on for them. </p>
<p>Clients have choices. If enough clients choose not to pay our high bills, we might reconsider our hiring and billing practices. There are plenty of law firms across the U.S. who don’t pay tippy top salaries and whose billing rates are likely lower than ours. Find them and use them. </p>
<p>As an aside, the admittedly high rates that junior lawyers get paid really come out of partner profits more than anything else. Most Biglaw firms don’t make money on their junior associates (I believe this was already established in this thread). Therefore, the complaints on this thread are really more about the amount of money partners are making, and not what junior associates are getting paid (unless you are really just trying to tell the partners how and when to spend their money). All I know is that for the amount of hours I work, I am getting paid a whole lot less than many, if not most, of my clients and their other service providers. So, if you don’t like this system, go ahead and occupy Wall Street and complain about unfair the world can be. While you’re busy with that, I’ll be working hard to help my client raise capital, build a new manufacturing facility and create jobs. </p>
<p>That’s a heck of a cop-out. Clients presumably want to hire top law firms because they have the savviest law firm partners who actually provide valuable legal services. The problem is, for the last few decades, clients couldn’t simply hire those savvy law partners on an a-la-carte basis for a reasonable price. They have to order the complete law firm prix-fixe package deal, including highly paid new associates which we have all agreed do not provide value commensurate to their pay. Even a standalone order of just the law partner would likely be billed at such a high rate that I might as well buy the whole package. For example, while the Wall Street Journal newsstand price is $2 and consists of 4 sections, I can’t just say that I want to buy only the business section for 50 cents. I have to buy the entire paper for $2. Or even if they would unbundle just the business section, if they charge $1.50 for it, I’m not really saving that much, so I might as well pay $2 for the whole package. Nor do I have much alternative, because none of the other newspapers such as the NYTimes or the Financial Times with top-flight business sections are willing to unbundle their package for a reasonable price either. </p>
<p>So again, this is not an example of the workings of an efficient free market, but rather the precise opposite - a market failure. Free markets presume that quantities can grow to match a market-clearing level. This is not the case for what is clearly a positional good of top lawyers: by definition, only a small percentage of lawyers in the world can be considered to be the best (defined to be better than most other lawyers). Those scarce top lawyers, who are presumably predominantly biglaw partners, have market power and can then engage in rent-seeking behavior which the clients have no choice but to endure, or else forgo their services.</p>
<p>The analogy would be that if I’m a baseball team owner, and I want to maximize my chances of winning the championship, then I have to hire star players, of which there are only a tiny handful in the world and who can therefore dictate terms. If Alex Rodriguez says that I must also hire his entourage of useless retainers as a package deal, well, that’s what I have to do. Otherwise, the fear is that a rival team will hire Alex Rodriguez and then beat my team. Star athletes are positional goods, as to be a star is by definition to be relatively better than most other athletes, which means that not every team can have a star. </p>
<p>Now, granted, instead of Alex Rodriguez, I could simply hire some other baseball star that doesn’t insist on an salaried entourage. But what if every star insisted on an entourage? Then I must pay that entourage. Similarly, if every Biglaw firm packages an appetizer of loss-making associates with the entree well, hey, I’m hungry and I don’t want to resort to McDonalds. </p>
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<p>See above. Clients don’t dare, because no client wants to lose a lawsuit, and biglaw partners are positional goods. Clients fear that if they don’t hire a biglaw firm, their opponents will and then beat them in court. Just like if I, the sports team owner, fear that if I don’t hire star athletes, my opponents will and then they’ll beat my team for the championship. </p>
<p>Certainly I agree that if clients could uniformly choose not to hire biglaw, then biglaw would change its ways. But they can’t, because they can’t coordinate amongst each other. Similarly, if team owners could coordinate amongst each other to meet star athlete demands, then those stars would have to reduce those demands. But owners usually can’t (unless they lock out their players, as with the NBA now). </p>
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<p>Which therefore opens the door to another market failure possibility. If you are right, then perhaps the fact that the price for legal services is (relatively) small for them means that they are uninterested in economizing further. This then becomes a psychological/behavioral motive rather than a market motive. {For example, psychologists have demonstrated that people are far more willing to drive across town to save $10 on a $20 shirt than to save $20 on a $1000 computer when it rationally should be the reverse. $20>$10, but somehow that savings of 50% on the shirt is more psychologically compelling than savings of 2% on the computer.} </p>
<p>So perhaps biglaw is preying upon the cognitive biases of clients when setting fees. But that still doesn’t quite explain why biglaw associates are paid so well. </p>
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<p>And as I said, that’s the most interesting phenomenon of all. Why would partners continue to pay associates highly, when we’ve all agreed that they do not generate profits by doing so? I can only think of a few possibilities:</p>
<p>*Partners see paying high associate salaries as a form of noblesse oblige or even charity. Those associates don’t really deserve that pay by any productivity metric, but partners will pay them well nonetheless. But if that’s the case, then hey, why not pay me? If partners want to give money away, I’m happy to oblige. </p>
<p>*Associates derive productivity from their brand of law school. As somebody else argued before, maybe biglaw can tout the fact that they have associates from YLS or HLS as part of a marketing strategy to convince clients of the value of their services. </p>
<p>But that doesn’t seem quite right either. If that were so, then biglaw should only pay high associate salaries to those associates who come from brand-name law schools. Only the associates from YLS or HLS should be making the high associate salaries, not those who came from the lesser branded schools. {It’s hard to see the marketing potential of graduates from the University of Michigan Law School, relative to YLS/HLS. Are there really lots of clients clamoring for their cases to be assigned to graduates of UM?} </p>
<p>So why are all new associates at any given biglaw firm paid the same, regardless of which law school they came from? {Obviously biglaw is likely to hire more HLS/YLS grads than UM grads, but any UM grad who is hired into biglaw will be paid at the same level as HLS/YLS associates. Why?}</p>
<p>*A profound economic/sociological change occurred recently. As discussed previously, biglaw associate salaries did not rise to excessively high levels until perhaps 1-2 decades ago. Why only then and not before? Did the marketing value of law school brand names become attractive to clients only recently? Did partners decide to become ‘charitable’ to associates only recently? </p>
<p>No matter how you slice it, we seem to have more questions than answers. The fundamental issue remains unsolved: Exactly why are newly hired biglaw associates paid so well, when we all agree that they’re not highly productive at that stage in their career?</p>
<p>sakky, it’s not a cop out. Clients of law firms have choices – a whole lot of them. If they don’t think that their law firms are doing a good job at a fair price, they should go elsewhere. The fact of the matter is that few clients are doing that, and it’s not about being stuck taking the whole package just so that they can obtain the services of a superstar partner. Believe me, there are plenty of superstars out there, too. If I needed an attorney to do some corporate legal work for me (since that is the world where I live), there are more than a handful of attorneys who would be on my short list.</p>
<p>You can talk about economic theory all day, and I could answer you in kind. Instead, what I will tell you is that top law firms that have cut starting associate salaries or who don’t keep up with the top market rates suffer in recruiting. In fact, they fail to be considered top law firms anymore on many counts. </p>
<p>There are a number of law firms that have chosen to reduce their starting salaries from the $160,000/year benchmark or that have not kept up with incremental increases in salaries in later years. There are also law firms that have failed to keep up with the end-of-year bonuses and other bonuses. In this age of abundant knowledge available in a click or two and in message boards catering to aspiring lawyers, top law students (and, for that matter, lateral candidates) know which law firms have failed to pay and are focusing their efforts on the law firms that are market leaders in pay. </p>
<p>So, for the most part, the top law students at the top law schools are focused on taking jobs at the Skaddens, Simpson Thachers and Cravaths of the legal community. Assuming that they get an offer from one or more of the top (as defined by salary structure) law firms, they will typically go there. (I’ve never been entirely convinced that the best lawyers were necessarily the top law students at the top law schools, but that is another conversation). </p>
<p>So, why is it so important to hire these name brand law students? Well, among other things, they are usually quite bright, eager and quick. Law school teaches you how to think like a lawyer, how to approach problems and how to find the answers to those problems. However, the magical thing that separates the really good lawyers from the average joes is an ability to navigate a path through the myriad gray areas. Students who have worked in fields where they have faced these gray-area issues, or who have gone to schools where they have been forced to think outside of the box rather than simply regurgitating the contents of a textbook or some lecture notes are prized, and are often found at top law schools. It’s really that simple. I need young attorneys who are bright enough and brave enough to make some hard decisions (and I will be there to guide them and offer my opinions into the mix). </p>
<p>In addition, some clients simply like to see a roster of name brand schools on their law firm resume. I can’t explain why, but I hear it all the time. Of course, if a lawyer has established him or herself in practice and is acknowledged as a leader in his or her field, law school brand value matters less. However, it does matter in those early years.</p>
<p>The fact of the matter is that my very junior associates are extremely valuable to me and my clients – many deals would simply not get done in a timely manner without their assistance. I take great pride in training young associates, and the vast majority of them have learned quickly and added value to transactions. </p>
<p>So, if you want to debate in terms of economic theory why young attorneys at top law firms are paid so well, have fun with that . . . really. I do find what you are saying interesting, sakky. However, the fact remains that I am proud of my junior associates and we happily pay them the salaries that they receive. They deserve it.</p>
<p>Sallyawp, I should emphasize that this is not meant to be a confrontational discussion in the least, but rather an earnest explication about the intriguing issue of BIGLAW associate salaries. I have great respect for you and your opinions. </p>
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<p>Actually, this is a cop-out, because client behavior is a second-order effect at best. Client decisions exert no direct effect on what associates are specifically paid. All that clients can do is accept or veto the entire package deal: consisting of the entire suite of legal services of the law firm, including contributions by partner(s), associates, paralegals, secretaries, janitors, etc. But just as a client cannot specifically tell a law firm what they should pay their janitors, clients also cannot tell a law firm what they should pay their associates. </p>
<p>To those that might object that itemized law-firm billing rates are directly tied to associate salaries, I would argue that that is only by way of an accounting convention , and such conventions have nothing to do with pay. For example, BIGLAW associates may well be billed out at $300-400 an hour to the client. But what portion of that billrate is then paid to the associates is entirely up to the partners. The partners could choose to keep as much or as little of it as they want.</p>
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<p>Ironically, I am doing the exact opposite, for my statements have nothing to do with economic theory at all. Indeed, pure economic theory would dictate that new associates would be paid far less than they do. That’s because neoclassical economic theory would hold that, at equilibrium, all employees are paid at a rate equivalent to their productivity. Yet we have all established - and nobody has disputed - that new associates are not highly productive. This is a direct violation of economic theory and must therefore be explained by other forces.</p>
<p>Furthermore, to take the example above, clients, through choosing or vetoing a law firm, do exert market pressures upon law firms. Those law firms who are in high demand will be able to extract greater payouts from the market (that is, from clients). However, the pay decisions made within the law firm have nothing to do with market forces whatsoever, but rather are decided purely through (partner) fiat. Put another way, market forces from clients can only determine the size of the revenue pie that law firms can divide, but they have nothing to do with how that pie is then divided amongst individual employees. If Skadden tomorrow decided that they wanted to pay million dollar bonuses to their janitors, clients don’t care. All those clients care about is that they are obtaining the desired legal services, and whatever the Skadden partners decide to do with the fees that they pay is irrelevant to them. </p>
<p>Which makes it all the more irrelevant that Skadden (and the rest of the BIGLAW cohort) have decided to pay such a large fraction to new associates, when, to reiterate, those new associates are not highly productive. This is a direct violation of economic theory, and can therefore be explained only through psychological/sociological forces. </p>
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<p>It is entirely economically rational for law students to focus upon BIGLAW and their hefty salaries. Heck, if there were some employers in my field who were willing to overpay me, I would be focused upon that employers as well. Everybody wants to be overpaid. </p>
<p>But that’s not the question on the table. The question is, why do law firms persist in offering overpaid salaries, relative to the value they obtain from those associates? </p>
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<p>So let those other firms win, for some ‘contests’ are not worth winning. Surely our moms have all told us: “Just because your friends jump off a cliff doesn’t mean that you should do the same.” If other law firms want to lose money by paying more for their associates than what they are worth, that doesn’t mean that your law firm should do so. Presumably, each BIGLAW firm is maximizing its profits, and if new associates are a losing proposition (at current salaries), then why participate? </p>
<p>Put another way, why should I deliberately choose to hire people who are not worth what they are being paid, just because my competitors are doing so? Is it somehow better if BIGLAW firms all lose money together? Again, this seems to point to a sociological explanation rather than an economic one. </p>
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<p>I am not disputing that those new associates provide some non-zero value. The question is whether they provide sufficient value to justify their $160k starting salaries, and we seem to unanimously agree that they do not (would anybody like to argue that they actually do provide such value?). </p>
<p>So why not pay them according to the actual value that they provide. </p>
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<p>I discussed this possibility on a previous post, and others have advanced it as well. The argument seems to be an invocation of marketing: that clients perceive higher quality service being delivered by law firms that employ associates from name-brand schools, and are willing to pay accordingly.</p>
<p>But again, this explanation founders on two points:</p>
<h1>1) As mentioned before, clients pay only a package fee for a package deal of legal services, and are unable to influence how that fee is then divided amongst the employees of the law firm. A law firm can proudly sport a bevy of HLS and YLS graduates to spur greater client fees, but still choose to pay those HLS/YLS graduates poorly while retaining the bulk of the fees for the partners. Why not?</h1>
<h1>2) Why not then hire more mediocre graduates from the top-branded law schools at the expense of top graduates from lesser schools? After all, if the true purpose is marketing, then why don’t BIGLAW firms hire more of the mediocre graduates from HLS and YLS? After all, they still have degrees from HLS/YLS, so they can still be leveraged for marketing purposes. Presumably, clients cannot access the transcripts of those graduates, so all they’ll see is the HLS/YLS brand. Why not hire them in favor of a #1 graduate from, say, the University of Michigan Law School? As prominent of a law school of UM is, it surely doesn’t have the brand-recognition of HLS/YLS. If the true purpose is marketing, then you should emphasize marketably branded products.</h1>
<p>Under such a scenario, one might therefore reasonably expect that every YLS and (especially) HLS student, even the low-performers, would have a guaranteed BIGLAW offer upon graduation. After all, whether we like it or not, Harvard is the world’s premier luxury brand of higher education. If client-oriented branding is indeed the core value-add that associates provide, then exploit that fact. </p>
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<p>Like I said, I am not denying that there are some new associates who are extraordinarily productive. Undoubtedly, productivity exhibits high variance. </p>
<p>But the crux of the issue is that, on average, from a statistical standpoint, new BIGLAW associates are being paid far more than their productivity level alone would merit. This seems to be especially so for those new associates who didn’t graduate from a luxury-brand law school (such as UM) and hence cannot easily be leveraged for client-oriented marketing. So the core question is: why do they continue to be paid so highly</p>
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<p>Like I said, economic theory does not seem to hold; indeed the opposite seems to be true: economic theory is routinely and persistently violated. </p>
<p>If you still disagree, allow me to provide some variants on the theme to illustrate the fact that economic theory is not at play. </p>
<p>*** Why have BIGLAW salaries risen to such high levels only recently?** As we had established, BIGLAW salaries hitched a rocket-ride only in the last couple decades. Presumably, market forces existed before then. If economic forces are really determinative, then why weren’t BIGLAW salaries always this high (inflation-adjusted natch)? Did the market for BIGLAW services dramatically change only recently? Did law school graduates become far more productive only recently? </p>
<p>Why don’t biglaw associate salaries fluctuate? After all, markets perpetually fluctuate; they sometimes rise, sometimes fall. But associate salaries never seem to fall. A price-ratchet is clearly at work: salaries can only rise with market rises, but when markets fall, salaries don’t fall. Rather, the fluctuation impacts hiring; BIGLAW hires more or fewer graduates in accordance with the fluctuations of the market, but intriguingly, never really allows salaries to fall. That’s a clear violation of economic forces.</p>
<p>{To those who might argue that the economic concept of ‘sticky prices/wages’ are at work, that might indeed be logical towards explaining why the salaries of current associates remain high in the face of a downturn. It has been demonstrated that existing employees indeed exhibit a strong psychological aversion towards salary reductions. But why would the salaries of new hires be so sticky? They haven’t even joined the firm yet, so they have no psychological threshold to breach.} </p>
<p>Why do BIGLAW new associate salaries always seem to rise in tandem? All BIGLAW associate salaries seem to be coordinated in lockstep. When one increases its salaries, the others seem to not only to increase their salaries, but do so by the same increment. Economic theory would dictate that firms would be constantly competing with each other, and hence would offer a wide range of salaries specific to the varying market forces that each individual firm is facing. But again, this doesn’t happen: all the BIGLAW firms seem to offer the same salary. Not only is this a clear violation of economic theory, such coordination in other markets has been prosecuted by the Department of Justice as illegal collusion and price-fixing. {But I suppose that since the effects of BIGLAW salary-fixing is high salaries for associates, nobody has standing as an aggrieved party.} </p>
<p>Economic theory is therefore routinely violated. The only rationale that holds seem to be a psychological/sociological quirk among BIGLAW partners that compels them to pay new associates above what their productivity would merit. Like I said, economic theory would dictate that new associates be paid according to their productivity, which would be relatively little. </p>
<p>Rather, what I think is happening is a psychological competition for social status amongst BIGLAW partners. They seem to equate paying high salaries for ‘top’ associates as a mark of social status, despite its unprofitability. I recommended that a firm could simply lower its salaries, and if new graduates then choose to migrate to other firms, who cares, as those new grads would have been unprofitable anyway. But nobody wants to lose a status competition, and indeed, people will pay dearly to avoid a loss of status. </p>
<p>“Just because your friends jump off a bridge doesn’t mean that you should do the same.”, as our moms told us. From a purely rational standpoint, obviously you shouldn’t jump off a bridge even if your friends do. But if not jumping off that bridge will result in a loss of social status, then that sadly explains all the jumpers.</p>
<p>They haven’t really. Cravath raised starting salaries by fifty percent in the late 60’s, and then raised them from $53K to $65K in the mid-80’s. Profits have probably risen a lot faster than associate salaries recently.</p>
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<p>Salaries might not, but compensation certainly does. Bonuses are a fraction of what they were a few years ago, so biglaw associates are actually making considerably less than they used to.</p>
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<p>Well, because they’re trying to keep up with each other (or, historically, trying to keep up with Cravath). This happens in a lot of industries (accounting, consulting, etc.). </p>
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<p>Most fields don’t pay entry-level workers according to their productivity, since it’s generally very low. The fact that biglaw firms can directly recoup some of the cost of training associates by billing clients (to the extent clients tolerate it) probably means their pay is less out of line with their productivity than other industries. </p>
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<p>What if all their midlevel and senior associates also leave? If they only cut starting salaries, it’s not going to make much a difference, and certainly wouldn’t be worth seeming like a struggling firm that can only attract second-rate talent.</p>
<p>Why would midlevels and senior associates leave? Nobody is proposing to cut their salaries. We’re just talking about new associate pay. </p>
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<p>Client billing is merely an accounting gimmick. Law firms can bill clients for associate-hours as much as they want, but that doesn’t mean they must devote some fixed percentage of those fees to those associates. The firm can keep as much of those fees as they want. </p>
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<p>And those other industries that you mentioned would be equally irrational with their money. After all, just because your friends jump off a bridge doesn’t mean that you should do the same.</p>
<p>Besides, such behavior notably *does not *happen in surely far many more industries. For example, in many engineering disciplines, the response you would get from your existing firm if you obtained a higher-paying offer from another firm is that you should then go work for that other firm. The attitude seems to be that the firm’s salary structure is fixed, and if you don’t like it, too bad, as we’re not going to change it. They’re not going to jump off a bridge just because somebody else does.</p>
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<p>Actually, it seems clear that they really have. From 1996-2011, median starting salaries for firms with over 251 attorneys in New York, Los Angeles, Chicago, and Washington DC increased anywhere from 88-120%. Median starting salaries for law firms with over 251 attorneys (regardless of location) increased faster than that of any other size category of law firm. They also easily exceeded the pay at non-firm positions such as clerkships or prosecutor offices which increased by a miserly 43-48%. </p>
<p>So why have salaries at large law firms outpaced all other legal employers?</p>
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<p>So then why not just have a larger component of the pay be based on (fluctuating) bonuses? After all, that’s what the finance industry - for all their foibles - manages to do. </p>
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<p>And now we’re getting to brass tacks. The pay doesn’t have anything to do with actual productivity, for I’ve still yet to hear a story that first year associates actually provide value commensurate to their pay. Rather, than the actual value of the work, it’s all about appearances - the big firms don’t want to seem to be struggling. </p>
<p>Indeed, apparently it doesn’t matter if they actually are struggling, just so long as they don’t seem to be struggling. After all, it’s now a well-established fact that biglaw has been hiring substantially less than they were during the boom times, and that bonuses are down, which clearly signals that those firms are indeed struggling. Yet reducing starting salaries is somehow anathema. Hence, during downturns, biglaw somehow prefers to hire fewer people for the same higher salaries than to hire the same number of people for lower salaries…apparently to keep up appearances. </p>
<p>In fact, if firms were truly so worried about maintaining the quality of their new associates, then why do they engage in such hiring binges during boom times? By doing so, they are surely eroding the average talent pool of their firm by hiring some relatively lower-quality associates who would not be hired during normal economic times. {For example, a few years ago, a low-ranked HLS graduate might still be hired by biglaw, but not these days.} The only logical answer is that biglaw doesn’t really care about the quality of their talent on an absolute basis, but rather only cares about keeping appearances by maintaining relative quality parity with other biglaw firms. </p>
<p>In fact, this explanation indicates to me that biglaw firms are akin to cliquish high school teens, closely observing each other and competing for status and popularity.</p>
<p>Besides, I’ll ask this: why haven’t salaries for high-end clerkships risen substantially? Federal clerkships pay notably low salaries compared to biglaw. Yet they seem to have little problem attracting prime talent.</p>
<p>Just to be clear, if junior associates are paid less, so are midlevel and senior associates. Generally, in lockstep firms (many of the top firms pay lockstep raises and bonuses to associates), with each year of seniority, associates make $10,000 - $15,000 more. It would not be practical for a firm to have a sudden increase at the fourth year of practice, for example, because many of the best associates would just be cherry picked by other employers during the first three years. Let’s not forget how grueling it is to work 80+ hours a week for a couple of years – any promise of a better work/life balance or better compensation would be welcome to many associates in this situation.</p>
<p>The median starting salaries in your list are not accurate for the population of law firms I’ve been describing. The top law firms in NYC (not simply the largest, and only recently do other cities like DC, LA and San Francisco match NYC salary levels) paid starting salaries of between $85,000 and $87,000 from the mid 1980s through 1996. During that same period of time, in big law firms in NYC, partner profits tripled to quadrupled. </p>
<p>Without warning, in 1999, a couple of San Francisco law firms actually struck the first blow by raising starting salaries up to $95,000ish. NYC law firms quickly matched. By then, the Internet was popular, and was abuzz with the news of which firms had kept up with the leaders. During the following several years, starting salaries rose each time one firm or another, in one big city or another, raised salaries. Everyone felt the need to match. </p>
<p>Law firms were competing vigorously with private equity and venture capital firms, consulting firms, investment banks and other plum employers for the best candidates, not only right out of law school, but as second and third year associates. Start up Internet and other technology companies were poaching second and third year associates to work in house at nice salaries with the potential for huge payouts based upon options or if the companies went public. Salaries rose to make staying in law firms attractive. It didn’t matter. Total pay in banking, private equity, etc. was much higher than in law, and many young associates with top credentials left law firms. </p>
<p>Partner profits continued to rise significantly during this period of time. Associates had a good idea of the millions of dollars that partners were taking home, and after counting the extreme number of hours the associates were putting in, it would have been next to impossible to suggest that associates shouldn’t have made more money. And so they did.</p>
<p>Starting salaries have remained stable at the $160,000 level for about 5 years now, and they won’t likely go up any time soon. Any concerted move by law firms to lower starting salaries across the board could be viewed as an antitrust violation under current U.S. laws.</p>
<p>But why do salaries have to move in lockstep? Once again, we’ve highlighted another *social<a href=“as%20opposed%20to%20purely%20rationally%20economic”>/i</a> choice made by law firms. </p>
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<p>And what would be wrong with that? Let them leave. Or at least, let the brand-new associates leave. After all, we’ve already established (and nobody has yet disputed) that new associates represent a net negative value for the firm anyway, in that the value they provide is not commensurate (on average) with their pay. Their leaving would only improve the profits of the firm, which is what an economically rational firm would want, right? </p>
<p>Once again, we’ve highlighted the fact that law firms are not behaving economically rationally, hence requiring that we look for other explanations. Like I said, just because your friends jump off a bridge doesn’t mean that you should too…as long as you’re behaving rationally. O the other hand, if you’re not behaving rationally, that opens the door to a wide range of possibilities. </p>
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<p>And again, I must repeat my main observation: those market pressures that you cited no longer exist. The dotcom boom is long-gone. Yet apparently the effects of the dotcom boom within the labor market for law associate salaries are very much alive, in that while the pressures of competing dotcom salaries declined, law firm associate salaries did not. </p>
<p>This highlights once again the existence of a price ratchet. Economic theory would dictate that an additional source of demand exerts pressure upon a particular market, prices will increase, and when that demand source is withdrawn, prices should then decline. But in this case, prices (that is, biglaw associate salaries) refused to decline despite the dotcom bust. Hiring of associates declined during the dotcom bust, but the salaries refused to decline. </p>
<p>Regarding the demand for consulting, Ibanking, PE, and the like, exactly the same analysis holds. During the finance (and to a lesser extent, consulting) bust of 2008-2009, law firm associate salaries should similarly have declined as another source of extraneous demand was withdrawn. But once again, salaries refused to decline. Hiring numbers decline, but salaries apparently never do. </p>
<p>In other words, biglaw associate salaries are apparently a monotonic function, a clear and fascinating violation of economic precepts. Apparently, past market history (90’s dotcom boom, mid-2000’s finance boom) lives on in the form of high biglaw associate salaries. </p>
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<p>Um, why? That’s not how it works in most other industries. Surely everybody at Microsoft knows fully well how rich Chairman Bill Gates and CEO Steve Ballmer are, as their wealth is a matter of public discourse. Microsoft stock pays an 80-cent per share yearly dividend, which means that Gates and Ballmer are respectively paid about $400 million and $250 million annually just in dividend payouts alone, and that’s not even factoring in the value of the stock itself. </p>
<p>But simply ‘knowing’ how much both the Chairman and the CEO were making doesn’t mean that Microsoft engineers can simply ‘demand’ higher salaries, no matter how long many hours they work (and Microsoft engineers in particular do work long hours). Microsoft decides what salaries they should earn, and if the engineers don’t like it, they can attempt to negotiate for better but with no guarantees of success. Trust me, to pronounce: “The reason I should be paid more is because Gates is rich” will not be a persuasive negotiating strategy. </p>
<p>Nor is it easy to make the argument that Microsoft is a poorly managed firm, as I suspect that Microsoft generates comparable profits to all of the biglaw firms combined. Perhaps a major determinant of their profitability is that they can rein in employee salaries. </p>
<p>The same can be said for plenty of other tech firms. Larry Ellison is worth over $30 billion, but that doesn’t mean that Oracle employees can leverage that fact to obtain higher salaries. Sergey Brin, Larry Page, Mark Zuckerburg, Michael Dell, Warren Buffett, the Koch Brothers - all billionaire business leaders. But that fact alone provides no foothold for their employees to demand higher pay.</p>
<p>Which only makes it all the more remarkable that biglaw associates can demand (and successfully receive) higher pay from their firms’ leaders, when employees of firms led by far wealthier leaders apparently cannot. </p>
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<p>Yet - like I stated before - isn’t it interesting that the same concerted behavior to increase biglaw associate salaries in tandem did not attract antitrust attention. But why not - after all, price-fixing is price-fixing, right? It shouldn’t matter whether firms collude to fix high or whether to fix low, all that should matter is that they are fixing prices.<br>
You even said it yourself - during the dotcom boom, San Francisco law firms first raised their salaries, and then NYC law firms quickly matched. But why should they have matched at all? Economic theory would dictate that each law firm should calculate the value of each employee and then pay them accordingly (+/- a stochastic error) so that labor is efficiently allocated to wherever they would be most productive. If SF firms became more productive because of the dotcom boom (or some other reason) such that they can now pay new associates more, then that should have served as a price signal onto the market that more associates should migrate to San Francisco. The matching move by the NYC firms distorted that signal. This is basically tacit collusion (via price leadership), and has been prosecuted as such when practiced in other industries. </p>
<p>Evidently, the political, as opposed to the legal, logic is that price-fixing is perfectly acceptable if it means high salaries for the parties in question. But that only further demonstrates that associate salaries are not amenable to basic economic explanations.</p>
<p>Firms have tried many ways of handling associate pay. Years ago, many firms went with bonuses based on hours - the more hours the more money. This led to problems with honesty. There were reports of associates billing numbers of hours that were simply physically impossible. Clients complained and firms had to write off a lot of hours so the result was not what they had hoped for. Additionally, firms started losing some good people who just weren’t interested in working 24 hours a day, or pretending they did. Firms went back to lock step for the most part. Some set a minimum numbers of hours before becoming bonus eligible. Some have merit bonuses based on a variety of factors, with hours being only factor. Some firms give two bonuses - one based on individual merit and one based on how well the firm does generally. There are myriad combinations of all of these methods. There is no perfect way. </p>
<p>Firms want a certain number of young associates to leave, but they want a certain number to stay too because there is a lot of money invested in training. Partners like to have continuity in their teams. Some firms are better than others at giving hints to the associates they aren’t interested in keeping around long term. The quicker they let them know, the kinder it is to the associate.</p>
<p>sunfish beat me to it, but i was going to use baseball.</p>
<p>law firms want top talent, you have to pay for it when you’re competing with each other, and with public sector, public interest, and small firm alternatives. more generally, people are rarely paid exactly what they are worth. in general, people go through a productive arc, peaking in production in their middle years when training is complete but skill deterioration hasn’t set in. people are rarely paid based on this skills arc, they are generally overpaid upon entry and prior to exit; but underpaid in their most productive years. law firm associates are paid a ton of money because they will make the firm a ton of money down the road once their skills have matured. you can see this arc play out in the sports analogy, where draft picks are paid highly, the early productive years go underpaid [derrick rose], players in their prime demand long backloaded contracts [joe johnson] and typically end up being dead weight on their team’s payroll in their later years [alfonso soriano]. </p>
<p>put another way, first year associate pay may only be too much if you discount the future. i can’t imagine a business forking over that kind of cash to a bunch of people that aren’t even going to make the cut 5 years down the line unless they have to.</p>
<p>“The American Lawyer magazine just published their annual survey of large law firm (AmLaw 200) leaders. Some key findings:
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54% reported that clients refuse to pay for work of first and second year associates.
…”</p>
<p>Actually, their explanations are elementary: the NBA and MLB have robust unions. As a case in point, while the latest NBA agreement that concluded the lockout was portrayed as a relative victory for ownership, the fact is, the union still negotiated a deal that the rest of us could only dream of having. Imagine how much higher salaries would be for engineers, or even lawyers, if ownership agreed to split half of all revenue (not profit, but revenue) with employees and, and no firm could spend less than 85% on total salaries than the average of all competing firms. As an example, Microsoft generates $71 billion in revenue annually. Splitting 50% of that revenue with its 90,000 employees would mean that the average employee salary at Microsoft would be nearly $400,000. And remember, that calculation includes all Microsoft employees, including secretaries, janitors, security guards, etc. {Furthermore, the comparison doesn’t even factor in the fact that the NBA 50% revenue-split is disbursed only amongst the players - regular employees of NBA teams such as trainers, marketing staff, ticket salesmen, etc. are not included - so that average player salary is driven even higher. A 50% revenue split from Microsoft to be disbursed only amongst the engineers would surely mean that the engineers would all be paid 7-figure salaries.} </p>
<p>As a historical example, it should be noted that it wasn’t that long ago when baseball and basketball salaries (adjusted for inflation) were unexceptional even for the superstars, let alone for the rookies. Yogi Berra had a peak salary in 1961 of [url=<a href=“http://sportsillustrated.cnn.com/vault/article/magazine/MAG1075363/index.htm]$55000[/url”>http://sportsillustrated.cnn.com/vault/article/magazine/MAG1075363/index.htm]$55000[/url</a>] - which would be the equivalent of less than [url=<a href=“http://www.westegg.com/inflation/]$400,000[/url”>The Inflation Calculator]$400,000[/url</a>] in today’s dollars. We’re hardly talking about a middling player - Yogi Berra is arguably the greatest catcher in baseball history, being the only catcher to win 3 MVP awards. Similarly, Mickey Mantle made peak salary of only $100k, which is the equivalent of only $650k in today’s dollars. This is Mickey Mantle we’re talking about here! Even the great Babe Ruth and Ty Cobb made the equivalent of only about $1 million in today’s dollars; a backup role-player on an MLB roster makes far more than Ruth or Cobb ever did, courtesies of a muscular union.</p>
<p>But lawyers don’t have unions. So I must ask the question again: why exactly are biglaw associate new hires so well paid? Consider the following:</p>
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<p>All firms in all industries want top talent, or at least claim to. Engineering firms claim to want top talent, yet you don’t see salaries of new mechanical engineers spiraling upwards. Pharmaceutical and biotech firms claim to want top talent, yet you certainly don’t see salaries of new biology and chemistry grads (even those with PhD’s) spiraling upwards. Heck, even hospitals feel little compunction to ‘compete’ for new medical school graduates for residency positions, who are paid a minuscule $35-45k a year. </p>
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<p>Again, the far better explanation is that baseball and basketball salaries are dictated mostly by union negotiations. The NBPA negotiated maximum salary strictures for new players such as Rose. The MLBPA negotiated enforced guaranteed contracts for unproductive aging players such as Soriano.</p>
<p>We should also keep in mind that MLB and NBA teams behave as a legal cartel. MLB enjoys an anti-trust exemption as a matter of Supreme Court ruling, because baseball is [url=<a href=“ESPN.com - Baseball's antitrust exemption: Q & A”>ESPN.com - Baseball's antitrust exemption: Q & A]apparently[/url</a>] not interstate commerce. The NBA’s status as a cartel is legal by virtue of the existence of the NBPA, as companies are immune from antitrust litigation regarding labor practices if employees are represented by a union (which is why the NBPA threatened to decertify which would then allow the players to sue the NBA owners for antitrust violations). </p>
<p>But, like I said, lawyers don’t have unions, and biglaw firms are not a cartel (at least, not formally). Which makes it all the more impressive that such high salaries are nevertheless garnered by brand new law school graduates, without the expense and bureaucracy of a union. Granted, those high salaries are available only to those who make it to biglaw, but that’s no different from the high basketball salaries being available only to those who make it to the NBA. {Those who can make it only to the D-League are paid orders of magnitude less.} </p>
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<p>Actually, it seems to me that the rational strategy for a law firm is to allow some other biglaw firm to incur the high salaries of training new graduates for the first few years, and then raid them once they’re fully trained and productive. Why not? Other posters here have stated that if midlevel and senior associates’ salaries were lowered (which I never recommended), then they would presumably leave for other firms which indicates that competition for trained labor is vigorous. So why not have other law firms (stupidly) incur the costs of training, while you later reap the benefits? </p>
<p>Again, to be clear, the key difference between biglaw and sports is that sports teams not only force players to sign multi-year contracts, but also (in the case of the NBA) can sign current players to add-on contracts through home-team preferential policies such as the ‘Larry Bird exception’. Biglaw is under no such restrictions. Associates are not under signed contracts, but rather are permanent free agents who are free to jump to other employers at any time. So why don’t they?</p>