Adventure of Strategy

My friend and colleague Gerry Riskin has just posted a piece on his blog Amazing Firms Amazing Practices about a pin approaching the "associate salary bubble" in the USA. I agree, but only to a point. The "bubble" is a complex beast.

Take a look, if you would, at the figure below. It represents the salaries that newly minted attorneys are reporting to their law schools, that they are earning in their first year in practice.

Have you ever seen a more perfect double-peaked distribution curve? The peak on the right represents those law school graduates that joined the commercial law firms. They are earning about $125,000 - $150,000 + per annum as they start along the path towards becoming sophisticated commercial legal advisors, whether in private practice in these august firms or in America's corporations. This peak, furthermore, is moving inexorably to the right in response to increased demand by these firms for premier entry level talent and, relatively speaking, a more or less constant stream of law school graduates over the past decade.

The peak on the left is a different matter. It represents all the law school graduates who are following career paths other than the top tier commercial law firms. They peak at about $35,000 to $40,000 compensation per annum. Roughly $100,000 a year less than their peers on the right! Furthermore, the left hand peak is creeping to the right only at about the rate of inflation; no more.

   Click to enlarge

This curve is of profound importance. It indicates that two completely separate legal professions have emerged in the USA, that hardly if ever intersect. So, if one reads a survey that says that "associates are unhappy," one has to ask which profession is being referred to. Likewise when people allude to other trends and characteristics.

The compensation of an experienced year partner in the "average" US law firm has hardly kept up with inflation over the past decade. Neither have salaries in the judiciary, leading to something of a brain drain. On the other hand, salaries of in-house legal counsel have increased far more rapidly over the same period. Even they, though, pale into insignificance when compared to the rate of increase in compensation of an Amlaw 100 partner. Which is not surprising. The latter are providing services far more akin to those of top flight merchant bankers than the lawyers of the Thursday night legal sitcom.

What could cause the bubble to burst? Well, supply and demand for top talent will keep salaries in the right peak high for as long as clients continue to prefer to procure the services that they do, from those firms.  On the other hand,Thomas Friedman's flattening world may alter the demand/supply balance, pushing work offshore to India and similar jurisdictions. (India now produces roughly the same number of law school graduates each year as the USA, i.e. about 40,000.) Some US firms may also dip into the stream of attorneys heading for career paths in the left peak and provide price competition to the firms on the right. This would be an advantage in an economic downturn, which would make clients more cost sensitive. So the current picture is not necessarily cast in concrete.

Several managing partners of mid sized firms that I have spoken to recently have expressed the view that "if the New York firms go to $200,000 for a starting salary, the market will fracture irreparably." It appears that this fracture has in fact already happened. In any event, the proportion starting at $160,000 or more (last year) is quite small. What this graphic does suggest is that those firms that do not want to pay top dollar may already be in a position where, like Fox Rothschild, they can simply elect not to try to keep up with the top tier New York salaries.

Indeed, these are interesting times. This is certainly a trend to watch carefully.

I don't believe salary makes the difference between happiness and unhappiness.

In fact, colleagues who are making less money than those in the AmLaw100 -- where I also have friends and colleagues -- appear to be generally happier (more content, etc.) than their more financially well-to-do counterparts.

Nor should anyone think that salary = competence. I know brilliant attorneys at all levels of income as well as near incompetents at all levels of income.

For another take on lawyer happiness or the lack thereof, see below:

http://www.negotiationlawblog.com/2006/11/articles/legal-practice/unhappy-lawyers-and-the-cooperative-hard-wire/

Rob

Congratulations on an extremely well written and informative piece.

Believe it or not we are actually knocking at the door of the $200,000 starting salary. To the best of my knowledge the UK office of Paul Hastings have gone up to 96,000 Pounds for a junior first year associate!

I think you might find my blog, and in particular my article dealing specifically with the latest round of AM Law 100 salary hikes, interesting - http://blog.law-scribe.com/2007/04/salary-hikes-ensure-legal-process.html

I agree with your flattening world point and also the creation of alternative ways to find high-quality legal service for a reasonable cost. The coming decades should be interesting.