With the news that
Sullivan & Cromwell evidently plans not to
boost associate bonuses (or salaries) this year, together with some
insightful reader commentary on my earlier
post about starting salaries,
it’s time to revisit the topic.
One train of comment suggested that, rather than bumping up associate
compensation across the board—and especially rather than bumping
it up for first-year’s—that firms give raises to classes in
their fourth, fifth, and sixth years, when associates are becoming
truly productive and profitable. Mitigate the "salary compression,"
in other words, that affects the middle associate classes.
Truth be told, I have often scratched my head at why firms aren’t
already doing precisely this. Certainly if one believes that an element
(not the only one, of course) of compensation should be attributable
to one’s economic contribution to a firm, this makes self-evident
sense. Young associates are, by and large, money-losers; mid-levels
are money-makers. So why the "compression" our commenter
complains about? My hunch—and if anyone has a better
idea, please chime in—is that law firms live with the compression
"because they can."
In other words, they simply do not have to pay mid-level associates
any more than they already do. Those associates have no more-lucrative
alternatives (certainly going in-house, except in the most extraordinary
dot-com startup spike, will not entail a raise). Furthermore,
the firms have good reason to want senior associates to enjoy a very
very material spike in income if they make partner—otherwise,
why beat your brains out for eight or nine years? This in turn
puts some soft upper limit on what you can pay the eight- and nine-years,
which of course has (negative) trickle-down effects on years four
through six. Assume the "final year" associates (at least
the ones the firm wants to keep!) are paid, all in, something approaching
$300,000, firms probably want to pay brand-new
junior partners at least 150% of that. If this is seat-of-the-pants
right, final year associate pay can’t go too much higher in the short
run. QED: Compression.
Another line of commentary tracked my supposition that some non-trivial
proportion of law school candidates had a viable option in pursuing
an MBA instead.
By and large, people took mild to strenuous issue with this.
I will start with a personal confession: I chose law school
over business school not because my lifelong aspiration was to practice
law for 40 years, but precisely because I fully expected to end up
in a business-centric role—and I thought the law degree would
be a more rigorous exercise in learning sheer analytic thinking than
the MBA. Now, with both the law degree and 98% of an MBA from
NYU (the night program), I can report from my own experience that
seems to be the case. (No offense, MBA’s! Your toolkit
is simply different, and largely appropriate to its ends.)
So I am probably at the extreme end of the bell-curve in viewing
JD’s and MBA’s as potential substitutes for one another.
But readers took the time to correct my assumption that most other
24-year-old’s would feel the same way I did then. One pointedly
observed that many law students "couldn’t hack" the more quantitative
MBA programs such as Chicago’s or Wharton’s. Others simply
took the not-irrational position that people don’t choose a graduate
degree based on the debt load and starting salary they will have
at the other end, but because they want to be a
lawyer or businessperson. Fair enough.
Finally, my friend Ron
Friedman wrote to speculate about the relative number of $125,000/year
jobs available for starting associates vs. the number of $150,000/year
starting jobs at McKinsey, Goldman-Sachs, and their ilk; Ron’s
intuition was that there are far more of the former.
My intuition is the same. I would hazard a guess that there
aren’t more than a few hundred $150K jobs in the country for starting
MBA’s, but if you do some back-of-the-envelope calculations for NLJ
250 starting jobs, you get something as follows:
- According to this year’s NLJ 250, there were 58,805 associates
in NLJ firms. - Let’s assume (this is a big assumption) the
average tenure of an associate in an NLJ 250 firm
is eight years—before
they go inhouse, go to a non-NLJ 250 firm, or take up basketweaving. (I
include in this average people who make partner and stay 40 years.) - This would imply the NLJ 250 need to hire about (58,805 / 8)
= 7,250 associates each year. - Finally, assume 75% of the NLJ 250 pay the $125,000/year "going
rate" for first-year’s.
So as a very rough approximation, there are (75% x 7,250) = 5,500
such jobs each year. Surely this is an order of magnitude greater
than the number of $150,000/year starting MBA jobs.
Ron and I also speculated on something even more hypothetical: Law
firms currently use law school prestige and class rank as proxies
to measure starting-associate "quality." But of course
crummy lawyers come from top-flight schools just as great lawyers
come from mediocre schools. Doesn’t this imply there’s an opportunity
for (NLJ 250) law firms to expand the talent pool from which they
draw by dipping deeper into the school/class rankings, paying such
hires less than the creme de la creme, and spending more in turn
on professional development and tracking?
To pose the question is to answer it: Of course firms could
do this.
Will they? In Ron’s or my lifetime? Not a chance.
