Caveat Archos

There has been much “net-noise” about the recent publishing of a study on first year associate pay being bi-modal, meaning that instead of having a nice bell-curve shape, as one would expect, the pay distribution for first-year associates has two distinct points, with a deep, steep valley in between. (See: A Picture is worth 1,000 Words). There has been a lot of talk in the blogosphere that this is evidence of a bait-n-switch scheme by lesser law schools who publish eye-popping salary figures while not disclosing the reporting biases, and other “reporting problems”, among other accusations. That may or may not be the case (I know for a fact at my welcoming orientation, the Fin.Aid officer told us to be “realistic” and not to expect “six-figure starting salaries” along with numerous other reality-biting admonitions.) Personally, I don’t think it matters. If someone overestimates their abilities to the point of being delusional thinking that they will be worth 160k right out of a law school not named Harvard or Chicago, they should pay accordingly. I don’t even think the people from the top schools are worth that much, but it’s not my money being spent.

Here’s what I think the bi-modal distribution shows: 1) The big law firms are maximizing their positions at the top of the global (read: not only American heap) and are so awash in cash that they are able to offer more money than should rationally be justified in paying a first-year associate, and 2) A decision on the part of the big shops to irrationally compete on the basis of price with each other for rather homogeneous talent, and, in doing so, take the market functionality of the labor market out of the hands of their potential employees. There is a perception that the firms reputation is tied directly to its compensation, and in particular, the compensation for first-year associates: the more a firm offers, the more “prestigious” the firm.

I think that’s a bunch of malarkey, and the anecdotal evidence proves as much: associate turn-over at a lot of the big-shops is upwards of 30%+ and has been so for many years. As Steve Miller says “they took the money and ran.” Many of the hotshots from the “Top 14″ schools get burnt out by the time of their first evaluation (2-3 years in), meaning that the big-shops essentially gave the now 3rd-4th year associate A) Their Brand-name; B) Invaluable on the job training; and C) Extremely high pay…all for inefficiency that doesn’t come close to equating that investment. The inefficiency doesn’t stem from the stupidity or laziness of the associates, as many of them are indeed intelligent and motivated individuals; it’s just that they can’t work “smart” enough to warrant their high salaries because they don’t know what they’re doing. Given the deep pockets of the firms, and the seeming inexhaustible amount of work to do (because of their positions at the nexus of the burgeoning global economy…who’s lawyers’ get the work done in China, India, Dubai, and around the world? I’m sure those countries have decent law schools, but their students don’t come close to competing with American grads), the firms and market can act “irrationally” in their hiring practices, as there is no market punishment mechanism.

So, what? Well, as a firm supporter of the market system, I think bigger law firms should allow graduates to compete on price, instead of strict-pedigree. I’m not saying that a student from Podunk Law School is just as good as a Harvard grad, but why not allow the two of them to apply to Dewey, Scruem, and Howe in the light most favorable to them? Why don’t law firms allow prospective candidates to submit bids for the work the firms have to do? The law firms are then put in a position where they could begin to trade-off the economizing feature of the “prestigious school” brand-name versus the value of the work they can expect from the graduate (which would REALLY test whether students from HLS, Chicago, etc. are really that much smarter than their brethren at “lesser schools”). For example, if DS&H has applications from Carl from Podunk and Winston from HLS, with Carl saying he’d be willing to work for 80,000 and Winston saying he’d be willing to work for ONLY 160,000, the law firm could measure the candidacies according to what they’d expect to lose/gain from employing either individual. If a firm decides, given Carl’s background, that he won’t be able to perform/learn, it could eliminate him as easily as it does now…except it would be doing so along much more honest and objective factors than “Harvard? Yes. Podunks? No.” But, in all honesty, are HLS grads going to be 2x as productive in the near term or in the distant future? Probably not (assuming pay is a direct correlative measure of productivity). Simultaneously, this system allows people from Podunk to measure their chances and discount their prestigiousness vis-a-vis HLS students in the near term.

I can see someone saying, “well, doesn’t the prestigiousness of the law schools do that to a great degree, leaving the firms being price takers as all the ‘necessary sorting’ has already occurred?” No, as a matter of fact, I don’t think it does. There are many negatively-impacting factors that completely skew the results for incoming students that effect the prestigiousness label of the law schools (see also: George W. Bush getting into Yale). The emphasis on LSAT scores is a case in point. I did fairly well on the LSAT (though, according to one Abovethelaw blogger, being at the 80th percentile is tantamount to being at the bottom) but I don’t think that test did my abilities as a future lawyer any justice in the least, and I’m sure the same thing can be said for many other students. Furthermore, the fact that I went to a small undergraduate school instead of State University of ____ probably impacted my chances of admission at some of the “better schools,” despite having competitive GPA stats and Involvement. As a result, my fellow classmates and I are put at a disadvantage for no reason other than “school name.”

Ultimately the question is: Should/Would/Could BigLaw take the steps of opening up the bidding in either the near or far term? One firm has went part of the way by setting reportedly their incoming pay so low (relative to market) for newer associates, and then ratcheting the pay WAY up for seasoned senior associates and partners. As much as it hurts to say this, I think this may be the most rational way of attacking the problem of inflated associate pay and it may signal the beginning of a movement toward a market solution to “market pay.” According to the WSJ blog-piece linked above, the partners at this firm are making at or near BigLaw partnership incomes, while the starting associates are making 60k, or about 38% of the BigLaw starting associates. Effectively, the incoming grads who lack the “prestigiousness” of HLS, etc. but still have very good GPA, involvement credentials (Law Reviews, etc.), and potential upside/desire are rightfully discounting their initial perceived value in the short-term for the opportunity to gain the experience of working in a BigLaw shop. As a result, their initial wage is much more in line with their initial productivity, and the increases in pay (with associate pay meeting/exceeding market by the beginning of the critical 3rd and 4th years) mirror the increases in their productivity as they begin to learn how to work “smart.” Some commenters on the Abovethelaw and WSJ Law Blog claim that this is “partner greed masquerading as concern for the client.” I don’t think this could be further from the truth: Partners can and should command the market salaries justified by their expertise and productivity. This firm recognizes that and clients seeking this firm’s representation understand that as well: they are getting exactly what they are paying for. However, what this firm seems to do that the other firms don’t seem to recognize is that clients don’t like to subsidize “rookie” mistakes, and they especially don’t like to pay $400+/hr for those mistakes. This allows the firm to be much more price-competitive in a buyer’s market. The commenters who say that everyone wins in this situation hit the nail on the head.

One final comment: I can reasonably foresee someone claiming, “but, wait, you claimed that US BigLaw stood at the nexus of the global economy and is able to dictate terms and now you’re claiming that it’s a buyer’s market? How can that be reasonably defended?” Well, it’s simple. US BigLaw as an industry does indeed stand at the nexus; however, individual firms have the flexibility and need in a dynamic, competitive marketplace to offer their own terms to clients at that nexus. Currently, the market for legal services dynamic is not punishing (though, it probably isn’t rewarding much) BigLaw firms paying 160k to first year students…but this doesn’t mean this will always be the case. The firms like this one (and their employees), who have constructed creative solutions to the problems of associate-bloated pay stand in much greater stead at every juncture and turn in the dynamic economy. They are (currently it is) doing a great service to its new associates, its senior level associates/partners, and, most importantly, its client-base.

Last word: This post is null-and-void if I ever get an offer at one of those BigLaw shops paying 160k/year. It’s not likely, but if I do, please ignore this post!