"Clients Won’t Pay For What Law Schools Churn Out"

[sakky]

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So how many industries, exactly, are totally irrational? It seems like it’s at least law, accounting, consulting and pretty much the rest of the financial sector.

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<p>Frankly, I would say that almost every industry are ‘irrational’ in the sense that compensation within any particular firm is driven by social and political rather than purely economic forces. That’s why I even hesitate to use the word ‘irrational’, for that implies that firms are somehow behaving insanely. In fact, they may be behaving quite sanely, given their social environment (which itself may not be sane). </p>

<p>As a case in point, why is it that managers of US firms are paid significantly higher than their counterparts in, say, the UK, Germany, France, or Japan? Are US managers truly that much more productive than their British/French/German/Japanese colleagues? Or is it simply a product of the fact that American culture tolerates higher wage differentials and social inequity than do those other countries? Heck, we’ve reached such ostensibly ‘irrational’ absurdities as local US division heads of foreign multinational firms often times actually being paid more than their bosses, the (foreign) CEO’s of that firm. </p>

<p>[European</a> CEOs make half the pay- MSN Money](<a href=“http://articles.moneycentral.msn.com/Investing/CompanyFocus/EuropeanCEOsMakeHalfThePay.aspx]European”>http://articles.moneycentral.msn.com/Investing/CompanyFocus/EuropeanCEOsMakeHalfThePay.aspx)</p>

<p>Here’s another one. Why is it that, after 1993 when the Clinton Administration instituted a tax deductibility threshold of CEO pay to $1 million above which only performance-incentives would be tax deductible (when beforehand the entire CEO compensation was tax deductible), did CEO’s now begin to negotiate for $1million as minimum base salary (when before, CEO base pay for many firms was far lower)? After all, the firm gains nothing from precisely matching that price point; all that the firm should rationally care about is the total amount it must pay to both the CEO in compensation and to the government in taxes. </p>

<p>Did CEO productivity all ‘coincidentally’ change at the exact same time as the tax reform such that all of them could rationally justify a $1 million base salary? Or did the regulation ironically establish a psychological price-point that $1 million salary was what ‘real’ firms pay their CEO’s? If so, keep in mind that psychological price points are not rational. </p>

<p>As a practical matter, the law’s requirement of performance criteria for deduction of pay above $1 million quickly established $1 million as the minimum base pay any self- respecting CEO expected from a major corporation.</p>

<p>[How</a> Bill Clinton Helped Boost CEO Pay](<a href=“Businessweek - Bloomberg”>Businessweek - Bloomberg)</p>

<p>one unforeseen development was that the $1 million cap became the de facto floor: No self-respecting CEO wanted a salary below the level that the government had set as a cutoff point. So even without the tax deduction, corporations just blew through the $1 million barrier anyway.</p>

<p>[RealClearPolitics</a> - Excessive CEO Pay and Job Losses: Are They Linked?](<a href=“http://www.realclearpolitics.com/articles/2011/11/05/excessive_ceo_pay_and_job_losses_are_they_linked_111950-3.html]RealClearPolitics”>Excessive CEO Pay and Job Losses: Are They Linked? | RealClearPolitics)</p>

<p>Hence, given that CEO salaries are not entirely rational, is it truly surprising that biglaw associate salaries may not be entirely rational either? </p>

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Which is probably what a law firm would tell you, too, particularly if it’s a biglaw firm, since they also have fixed salary structures. Most associates are gone within five years and firms generally do nothing to stop them. Do engineering firms really comprehensively re-evaluate their starting salaries every year, but without any consideration of what their peer firms are paying? Do they never raise salaries to gain a recruiting advantage over other similar firms?

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<p>I never said that engineering salaries were entirely rational either. In my opinion, they’re irrationally low. </p>

<p>But that only speaks to my general point: many (almost certainly most) compensation in most industries is irrational, in the sense that they are driven by social and political forces. For some reason, it has become socially and politically acceptable for associates, at least in BIGLAW, to become far more highly paid than most other professions and even other lawyers not in biglaw. {As a stark example, surely you realize that first-year biglaw associates are now paid more than even Federal judges.} </p>

<p>starting associates were starting at $160,000, plus giant bonuses, and lots of holiday swag, and then went on to $180K, and were thus clobbering the salaries of New York state judges who remained stuck at $136K and federal judges who were getting $162K</p>

<p><a href=“BigLaw Associates "are overworked and underpaid" (You Gotta Be Kidding Me!) - Updated! - New York Personal Injury Law BlogNew York Personal Injury Law Blog”>BigLaw Associates "are overworked and underpaid" (You Gotta Be Kidding Me!) - Updated! - New York Personal Injury Law BlogNew York Personal Injury Law Blog;

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Well, from 1967 to 1986, the starting salary at the biggest firms increased by over 600%, so again this “recent explosion” actually seems pretty minuscule.

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<p>Really? You have evidence of this? I presented evidence of the increase in pay from 1996 onwards. I think it’s only fair that you do likewise.</p>

<p>But even if what you’re saying is true, then that only modified the question: why have biglaw associate salaries increased so remarkably from 1967 to today? Did associates truly become far more productive and better-trained during that time span? Or does it have more to do with changing social factors? </p>

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Maybe because eliminating their (relative) stability and predictability would make it even harder for them to compete with the finance and other fields.

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<p>So let those associates leave for those other fields. As I said before - and everybody here seems to agree - new biglaw associates are unprofitable anyway. If finance firms want to waste money on them, fine. Just because other people jump off a bridge doesn’t mean that you should do the same. </p>

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And free agency. And a massive increase in revenue for clubs, including from TV deals that were a little hard to come by in Cobb’s era. Again, this is an explanation that completely ignores the underlying economics of an industry.

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<p>No, I entirely respect the holistic economics of the industry, if by that, you mean the socio-political forces surrounding baseball. </p>

<p>Take your example of baseball free agency. Free agency was implemented in 1974 only through a long-running battle with the player’s union. Let’s be perfectly honest - without the player’s union, players to this day might still be consigned to the strictures of the reserve clause and therefore would have been denied the lion’s share of the explosion of TV money (which had actually began to flow in decades before the institution of free agency). </p>

<p>Hence, the example of baseball actually (ironically) vindicates my point. Market forces can only explain the total pot of revenue that flows to a particular industry. But how that pot is then divided amongst the individuals within the industry is ultimately the product of a socio-political conflict. When the MLBPA did not exist, superstar players such as Cobb and Ruth were paid relatively little. Nowadays, because the MLBPA is widely credited as arguably the strongest union in the nation, even mediocre players can be paid more than Ruth (on an inflation adjusted standpoint). To assert that the internal socio-political forces such as unions play absolutely no role whatsoever in determining player salaries is to deliberately ignore the holistic ‘economics’ of the industry. </p>

<p>Which only makes the large biglaw associate salaries all the more intriguing, because they have no union. Yet they were somehow able to attain high salaries anyway. That would seem to be the makings of a truly brilliant strategy - earn high salaries that are far above your worth (for, as was established, new associates are unprofitable), all without having to pay union dues or risk being unpaid through official work stoppages (baseball has undergone 8 stoppages through union strikes or owner lockouts since 1972). How did they do it? </p>

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This is how a lot of smaller firms and most in-house legal departments function. Many of them hire few or no recent grads. It wouldn’t make a lot of sense to raid other firms for a ton of experienced attorneys when most of what you need them for is menial due diligence/doc review.

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<p>So why does biglaw need new associates when apparently small firms can do without? </p>

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Again, much of the work really doesn’t require training, and they bill the clients to recoup the costs.

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<p>No, again, like I said, what you bill the clients has no direct relationship with how you choose to pay your employees. </p>

<p>Let me put it to you this way. Law firms generally employer plenty of people other than merely attorneys: IT staff, secretaries, and the like. Their services are not ‘billed’ to clients. But the law firm still pays them, don’t they? Obviously they’re not working for free. What that demonstrates is that there is no clear relationship between how you choose to bill a client and how you then pay your staff. Market forces may determine whether clients choose to hire your firm and the fees that they pay. But how those fees are then distributed within the law firm is determined by an internal socio-political battle, which the clients don’t know about and don’t care. All they care about is that they are receiving the legal services that they paid for, and if the law firm then decides to pay million-dollar bonuses to its secretaries or spend it on some wasteful junket for the partners, hey, that’s not the clients’ problem.</p>

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It would make no sense to bring on experienced associates to do doc review. For associates you want to handle more substantive work, it’s preferable to train them yourself, and have them develop relationships with your clients and other attorneys.

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<p>Here I think you are arguing that new biglaw associates are in fact profitable, in direct contradiction to the unanimous verdict here on this thread. Is that what you are saying?</p>