Law firms all across the country fell all over themselves last month to hike associate salaries. Elie and Joe chat with Professor Bill Henderson of the Indiana University Maurer School of Law, an expert in legal industry economics, to discuss what just happened and where the industry goes from here. Spoiler: he’s not sure everyone should have given out those raises…
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Thinking Like a Lawyer – Above the Law
Law Firm Salary Extravaganza
Intro: Welcome to Thinking Like a Lawyer with your hosts Elie Mystal and Joe Patrice talking about legal news and pop culture, all while thinking like a lawyer, here on Legal Talk Network.
Joe Patrice: Hello! Welcome to another edition of Thinking Like a Lawyer. I am Joe Patrice from Above the Law and my co-host, who is not in the room with me, but is coming to you through the magic of the Internet; we are all together in spirit that way, is Elie Mystal.
Elie Mystal: I am in my basement and I am as hot as balls. I don’t even understand this weather.
Joe Patrice: Well, I mean, I understand it, it’s the summer.
Elie Mystal: You are a meteorologist now.
Joe Patrice: Well, I mean, enough to understand how heat works. I mean, I don’t purport to know what a high pressure system does.
Elie Mystal: Aren’t basements supposed to be cooler, like heat rises, right?
Joe Patrice: Heat does rise, and I am — and I am not having a comparison. My guess is, you are upstairs, it might even be warmer.
Elie Mystal: There’s certainly more children upstairs so probably, yes, warmer.
Joe Patrice: Yeah, exactly. So with that said, how have you been? You have not been here for a while.
Elie Mystal: Yeah, sorry our listeners, it has been a while since we have recorded. I have been a little bit ill, but I am back on the mend and back in the race, so we are going to kick up the recording schedule now.
So yeah, so this is the part where I am supposed to generally bitch and complain about something, and I can do that, I have got things that anger me, but I have got to say Joe, I am just — I am hollowed out, I am hollowed out. You figure my job is to professionally — my job is to communicate and I try to do that professionally.
Joe Patrice: I mean — and you try.
Elie Mystal: Exactly, I try, more or less I try. But I don’t know how to explain anymore what it’s like just being a Black person in this country and feeling like — honestly being afraid to go out of your house.
One thing I thought of in preparing for this podcast and to talk about this was, we do a lot of victim blaming in this country, and not all of it is bad, some victim blaming we do out of just the natural and honest desire to make ourselves different from bad things that we see happen.
We see badness in the world and we think like, oh, well, that’s not going to happen to me because I am this, because I am that, because I didn’t go down that dark alley or I don’t break the law. So, some of that victim blaming comes actually from a place of self-defense as opposed to a bad place.
And I think that the thing that — the reason why I feel so hollowed out is that I kind of can’t get over the image of Philando Castile, because you know Joe, they shot him with his kid in the back, with a four-year-old in the car, and for all the other people, all the other videos that we have seen, that’s the one that hits me, because like that — I also need to drive around White suburbs with my four-year-old in the backseat, and you can’t even be safe doing that.
If Philando Castile can’t even be safe doing that, then I can’t even be safe doing that. And the reality is that — and then nobody can be safe doing that. It’s not just Black people. Lots of statistics show that the cops — the cops are going to shoot X amount of people. If you are twice as likely to be stopped by the cops, you are twice as likely to be shot by the cops, but that doesn’t mean that every — but every police interaction for everybody carries with it a certain, to me, unacceptable risk, and yeah, so I am out of words to — amount of words to explain that to people.
Joe Patrice: I mean, actually I am going to go and disagree with one thing you said, importantly, I don’t think you are out of words, and this is it in a good way. I have been doing some of the editing of what you have been putting out. You have been on — you have had kind of a, I don’t know, like a series I suppose we will call it, unfortunately, it wasn’t a designed series, but your kind of set of the last four or five articles on this subject have been — they are over at the ATL Redline, if anybody wants to go read them, have been really good about hitting on a lot of these issues. So you haven’t run out of words, at least not as of yesterday night.
Elie Mystal: Well, thanks for that.
Joe Patrice: So that’s still going.
Elie Mystal: Well, let’s transition, I know it’s a hard segue, but here I will drag you through the segue, at least as it works in my mind, I am, like I said, hollowed out talking about cops and death, but you know what we don’t get to talk about very much anymore, money.
Joe has had the ability, the joy, the pleasure to be kind of a number one, covering the recent set of big law raises. Now, from my perspective, the first big law raise happened the day that I was put in the hospital, and then cops went crazy, and then people went crazy against cops, so I actually haven’t had a chance to really just wrap myself in the 05:20 of money raining down on my former colleagues in big law, and I would love to talk about that for 20 minutes.
Joe Patrice: So yeah, the issue that’s happened to catch everyone up, not that I don’t think anyone who listens to us doesn’t know this, but the big firms have issued raises, and after Cravath did it for their associates, the rest of the universe more or less started falling in line, and so now every firm was falling all over themselves giving out more money, and that’s where we are, and that was what created a lot of work last month and we kind of wanted to take stock of where we are with that today.
Elie Mystal: So our guest today is Professor William Henderson. He is a Law Professor at Indiana University Maurer School of Law. He is also the Chief Strategy Officer for Lawyer Metrics. I mean, if you know anything about the legal space, Bill Henderson is the guy to talk to about lawyer economics, about law school economics, about the business of the legal profession, and so we are so honored to have him on today. How are you doing Bill?
Professor Bill Henderson: Great. Thanks for having me on.
Elie Mystal: Thanks for joining us. Joe has a version of this question, I just want to start at the very kind of macro level, when you first heard Cravath raised associates salaries and raised the entire associates salary scale, what was kind of your initial reaction to that?
Professor Bill Henderson: It wasn’t shocking in any way, because Cravath and the New York market have completely different economics than the rest of big law, and I thought, well, perhaps it’s about time. I had heard some rumblings going back at least a couple of years, where the New York market really felt like it needed to be proactive in terms of attracting A level talent.
Some of the law firms in the New York market had been following the decline in law school admissions and looking at it from a supply chain point of view that says, are we going to have enough of the A grade talent. And so the very top of the market got proactive and just said, well, there is a limited supply of the people that we want, so we are going to be aggressive and we are going to go to 180. And there is probably maybe 15 or 20 firms that could have and should have followed it, but it cascaded throughout the United States into the Midwest, into the South and into some pretty irrational places.
Joe Patrice: Then dogs and cats started living together and mass hysteria broke. I have drawn a lot of ire from people all over the country, and by all over the country I mean outside of New York, because I needed that kind of stamp of approval on what I have been saying. I have been like there is no argument in the universe that someone in Dallas should be making the same amount of money as a Cravath Associate in New York.
Professor Bill Henderson: Yeah.
Joe Patrice: Yeah, it has been insane. And actually, this is a question that draws out of that, do you think that the fact that all these people have been raising is going to have serious repercussions, and maybe even lead to another set of raises in New York or more bonuses there or something? Because I will say, I talked to a Cravath source yesterday who was saying that all of their laterals — all the people who were like saying, oh, you know what, I am leaving now are all going to those sorts of markets. It’s not like they are going to other New York firms; it’s somebody going, well, shit, I am from Dallas, I am going back to Dallas.
Professor Bill Henderson: That’s actually been going on for a fairly significant period of time. Some of the law firms that I work with talk about poaching New York talent as they go back to the Midwestern market, or they come back to the Southeast or the Southwest markets, outside of the New York or the West Coast, and so that’s been going on for a while. But I can see how it make even more sense now because they have matched it across the US, so it just adds further economic logic. Hey, 180 goes a long way. If you are a midlevel associates and you are in Dallas and they follow that pay scale, I mean, you are living on a quarter of a million bucks, I mean, it’s pretty rich.
Elie Mystal: Is that an argument then that Cravath lowballed the market, right?
Professor Bill Henderson: No.
Elie Mystal: So expand on that, because it seems to me like if every firm can just so easily follow Cravath, maybe Cravath didn’t set the scale high enough where it would be painful for these firms to try to keep up?
Professor Bill Henderson: Well, here is what different is, is that say you are back to 2006, 2005, almost a quarter of law school graduates were going to what we call big law, going to an Am Law 200 firm and that was the first time the data was produced that showed what the entry-level salary markets were, and it produced what was called the bimodal distribution, Jim Lippold, now his organization put that out. And that was at the ABA, the summer of, I think 2006 or 2007 when that graphic was produced for the first time. I go, oh my God, I couldn’t believe what I saw, because a labor market does not clear with two humps, like a group of people making 40,000-50,000, another group of people that were making at the time, it was between 125 and 140, and it was this massive hump, and so this is a labor market in meltdown.
And actually that was the point about which I began to think about starting Lawyer Metrics, because I knew that the labor market was completely out of the whack. We are paying too much for some people and we are paying not enough for others.
Elie Mystal: From the first time I saw that chart — the bimodal salary distribution curve, from the first time I saw that chart I said, this is the most important chart in legal education. It’s an amazing graph. I mean, not to get all nerdy on you people, and it’s exactly because of what Bill said, it’s an amazing graph because no graph should look like that.
Professor Bill Henderson: No. And actually, Greg Mankiw, an economist at Harvard who writes all these microeconomic books or these economic textbooks for the 101 level blogged about it, and he said, labor markets shouldn’t clear like this. And he found it remarkable that — when you get somebody who is a presidential cabinet level economist that’s talking about it.
Elie Mystal: So the argument that Cravath isn’t lowballing is because of the curve?
Professor Bill Henderson: No, no, here’s what’s different. That mode has been melting for quite a long time, which means that, yes, some people are getting paid 180, but it’s a smaller percentage of the market, and it’s down to about 5% or 6%, and so the way a Chicago firm copes is they just hire a fewer entry-level people. So you have these much smaller classes of people that are making 180, it’s generally speaking much more skewed toward the T14 schools, and the firms, foolishly, to my mind, especially outside the New York market, because the New York market, they will hire you at 180, they will work you like a dog, and the clients will pay, because they are working on deals where, hey, the price of hiring Cravath or Sullivan & Cromwell is, is that you pay for these domain experts wrapped together with these associates.
And yeah, the associates are overpaid but, hey, you are getting Cravath, you are getting Davis Polk, you are getting Sullivan & Cromwell. And the firm, their leverage model still works. But you go down the big law chain and increasingly they are trying to fill their associate ranks from a lateral market, and fewer and fewer people are becoming entry-level associates, which means that the lateral market is very, very thin.
This is what’s most deleterious about this whole dynamic is, is that the profession is aging, because we are fewer entry-level people entering the Corporate Bar and they are just engaging in musical chairs as mid-levels, because there’s too few of them, and because the firms don’t want to pay the freight, train them, and pay them as entry-level so they just poach them at year 3 or 4. Well, if everyone does that, you have got the systemic problem.
So New York can afford to do this. I will go on record on this, the market is not broken in New York City; it’s broken for the firms outside of New York, for 15 firms, whatever, we can just say, maybe throwing a West Chicago firm and a West Coast firm, two West Coast firms and that’s it. They belong in that stratosphere; the rest of them, not so much.
Elie Mystal: The obvious transition though is from your other kind of base of expertise, what should a prospective law student be thinking about, how should they be looking at these salary numbers? I mean, you previewed it perfectly. When salary information first started being widely reported, we saw a huge spike in law school applications, because people followed the money.
Now that we are finally for the first time in 10-11 years seeing another spike in lawyers’ salaries, is that going to lead to an increase in law school applications or should it?
Professor Bill Henderson: No. Above the law it didn’t exist in the same way going back 10 years; I don’t know the exact start date, but you guys do a pretty good job of educating the entire market regarding — giving it a reality check, I don’t think it’s going to happen. Even ‘The New York Times’ covers this piece; Elizabeth Olson has done a nice job covering this. I don’t think it’s going to overheat.
I can tell you this, the students that I teach at Indiana are so much more apprised of the risk they are taking. They are there because they want to be lawyers, and to a certain extent, they understand they need to be more creative, and we are a Tier 1 public law school, but we are by no means feeding this 180 market. Maybe 5% of my students might end up there.
I would characterize my students as pretty realistic. They are making their own way, not necessarily dependent upon big law at all.
Elie Mystal: That’s a hopeful message. I like that.
Professor Bill Henderson: Yeah, and in law school, there are lots of fewer law school graduates right now; we are down to about 36,000 a year. That’s probably still too much to get absorbed job in bar license required jobs, but what I have been surprised to see is the students kind of landing on their feet in this JD advantaged market, where you actually are a better thinker, a better communicator with a law degree. I don’t know if it justifies the tuition you paid, but these people find their way in life. I don’t know if they will repay all their loans, but that’s the federal government’s problem.
Elie Mystal: Yeah, you have got to have some hustle to you.
Professor Bill Henderson: Yes, yes. And a few people that are — one of the things I cover in my research and that I spend some of my time at Lawyer Metrics doing is tracking the rise of these new legal entrepreneurs and the rise of managed services. And I think that over the next five years we are going to see kind of models that begin to exist astride Big Law that some people are going to find more attractive. It’s much more driven by efficiency, by innovation, much more role for creativity and collaboration.
The pay will be capped at something like a kind of high engineer’s pay, but you are going to see a kind of more mechanized kind of a technical class of legal professionals, many which won’t go to court, but they will very much be building systems to solve legal problems. I have touched upon this in a couple of articles I wrote for the ‘ABA journal’.
Elie Mystal: That was actually going to be my next question, but I want to frame it this way. So I have long been an advocate for the kind of two-tiered approach to legal hiring, and I know — like I get slammed as being an elitist when I say this. But you have like one kind of class of associate, the 180 associate, the partner track associate that’s been kind of trained and groomed and learning how to make it rain.
And then you have a different class of associate, the $80,000 a year associate, the in-source associate, if you will, who is being trained and groomed to be a service partner, who is being trained and groomed — yes, you are going to grind some hours. You are not going to get paid as much as the princeling, who is being groomed for partner, but you are going to be able to have a job, you are going to be able to have a career, you are going to be able to do work, and you are going to be able to build skills so that eventually if you have that spirit, you can move out and start your own practice. That’s one model.
The other model I think is more — sorry, that’s one solution. The other solution I think is more going towards what you are talking about, a more kind of — a technocratic kind of situation, the more kind of uber for law kind of situation, where we increasingly use technology to perform a lot of low-level legal functions or to empower an individual lawyer to kind of have the reach of a much larger group of low-level people using technology.
Which one do you like better or which way do you think we are going?
Professor Bill Henderson: I think that both frames that you set up are heading toward the same place. The first one with the kind of the two tracks of lawyers is being adopted by the large law firms, I don’t think is particularly successful; there’s ways to make it better. But I have seen that solution be put in place.
By the way, this stuff goes on in a way that’s not publicized very often. I spent a lot of time on the road talking to people and they just said, we don’t want people to know, we don’t think this is a competitive advantage. There is more innovation going on even in Big Law than people might realize.
In the managed services space, that more technocratic space here, that is going on, but we call it low-level — it’s characterized in a way that the work is boring or demeaning, that’s not what I have found. I have visited Counsel On Call, I have visited UnitedLex, I have talked to the people at Axiom, those people are passionate about their jobs; they are very skilled lawyers. And one of the most interesting things about that model is that it’s built around a contract hour.
And so, if they want you to work 42 or 43 hours, first of all, you don’t have to give them that extra three hours if you don’t want. But if you do, you actually have to pay for it, and it has led to this massive rise of project management and process improvement, which means that the entire enterprises are highly efficient.
Now Axiom and Counsel On Call and UnitedLex and a few others, they are built to scale. They are backed by private equity. They are backed by venture capital and they don’t have the same conflict constraints of Big Law. And the people that work in those organizations might make — they are going to tip into the six-figure salary, but they actually have work-life balance. They actually feel like they are working on a highly collaborative environment.
The office politics have been bled out because they have first-rate leadership and management, true organizational vision, and I have been very impressed by those folks, and it is the PE folks that funded this. I mean, this is smart money that has funded this and they have got a lot of running room.
And so one thing, I want to just go back to the big one, just touch on one thing, if I am going to advise big law on how to do this, because generally speaking, clients would prefer the big law change as opposed to buy from these new legal entrants, but the thing is, is that you can’t ex ante pick who should be on kind of the 80 track and who should be on the 180 track.
There are a lot of people that went to a T14 law school that actually would be happier working in a more service-oriented environment, but who can turn down 180, and they have the resume for the 180, but they are really meant to be on a more service track.
And there are many people that reach law schools that may not have the pedigree to get into the kind of the equity track, but they will work like crazy, they have tremendous passion and desire, or they are self-directed learners, and they will eventually end up equity partners with their own client base, and the firms — so you should have a permeable barrier between those two groups.
Let the people move from one track to another and don’t have an upstairs/downstairs mentality, and if you do that, you are really setting up some poor business organizational dynamics in my opinion.
Joe Patrice: One thing about that actually that’s interesting is, so one reason why a lot of people in T14, who might prefer going to the different model, one reason they don’t is they walk out and say I can’t afford to do that because of my debt. Is there some risk that this round of salary increases kicks off law schools’ increasing tuition and just makes that — exacerbates that problem?
Professor Bill Henderson: I don’t know. I think generally speaking, most law schools are running in a deficit, again, this is an under-covered phenomenon. Universities have been backstopping them, there are some law schools, and my present one included, we have got an endowment and we have got a rainy day fund that can carry us through, but the economics are starting to make everybody sweat.
The way the economics work is not so much tuition going up; it’s just the amount of discounts you need to offer to fill your class. And so, in most law schools they are going to be — if they can be, they are going to be a little less generous with merit-based financial aid, but if a law school does have the economic power to raise tuition, it will do that.
Most of us are running deficits right now. So that’s an under-covered story that law schools are — and when you move further down the food chain, some law schools are figuring out how to cover their bills. So we are pretty long away for law schools having the market power to kind of generate a profit again, like they have in the past, but we are pretty far off.
Elie Mystal: Sorry!
Professor Bill Henderson: There’s some market correction that’s going to take about 12 years to play out.
Elie Mystal: So that’s your timeline you think?
Professor Bill Henderson: It’s going to be a while. I mean, no university provost wants to pull the plug on their law school.
Elie Mystal: Yeah, as you said, for a long time they were a cash cow and they are not that anymore, but there’s still a prestige department in the university system and I think that will motivate lots of schools to keep their law schools running by hook or by crook. The danger to me are the unsupported law schools. The law schools that are not attached to a larger supportive university system, the ones that really have to — like you say, have to kind of make rent every month, those guys might be in a different kind of trouble.
Professor Bill Henderson: Yes, yes, yes, this is what is so stark about this 180 pay scale. It’s in a very rarified 90210 kind of like problem. It’s kind of the rest of us that kind of live in kind of greater LA, so to speak, the economics are much, much different.
And actually today I am headed off to do a function for a State Bar Association and one of the slides I will put up is the aging Bar. So we have all these law school graduates that are cranked out every single year and fewer and fewer of them end up as licensed members of the Bar. So there’s a paradox going on, how can we graduate all these law school graduates and the demographics of the Bar are actually getting older; they should be getting younger, because we have record numbers of law graduates, at least from historical levels. But people graduate from their law school and they go on to become columnists for new media conglomerates and things like that, or become law professors that run research companies.
Elie Mystal: No, that’s an interesting — so what do you think — I guess to close then, because it’s a point that I hadn’t thought of, what do you think that means long-term for the profession that even in this time of kind of oversupply of young lawyers we are seeing it age up. Does that make it harder to change, does that make it harder to interact with millennials, does that make it harder for the firms going forward to interact with millennials clients, with the Uber and the Twitter’s clients of the world?
Professor Bill Henderson: My answer to all those questions you just asked is yes, all these pressures are building, but there’s going to be a new model that takes place, it’s going to be kind of a — as Paul Lippe has said to me, and I think he is right, this new model will emerge and it will look obvious. We will look at it and say, of course, but it hasn’t quite emerged yet.
One thing I will give lawyers credit for, between competitiveness and conservatives, they are both, they are both competitive and conservative, but competitiveness wins. And so when the back is up against the wall here, lawyers are generally speaking going to figure out a better way to do things.
And actually, I will go a little bit further is that, I think lawyers — we make fun of ourselves and the public makes fun of us, but generally speaking, it’s a value-based group. It’s not a perfect group, but by and large, we figure out how to do the right thing in the long run, and I think there is going to be a reset. It’s going to take place. We are what, 12 years, we are probably five years into a 12 year fix, but we are headed to a better place. I am proud to be a law professor, but we are going to be graduating legal professionals, not necessarily courtroom lawyers.
So legal problems aren’t going away, they are going to be solved with technology, with teams. We are headed to a different place. I think it’s going to be mostly better. So I am not pessimistic at all.
Elie Mystal: Yeah. Let’s leave it with that little cup of optimism. Trump is going to win. He is going to make legal work the best beautiful legal work for all of us, no matter what kind of law we practice.
Professor Bill Henderson: That is really optimistic, but we won’t go there.
Elie Mystal: Bill, thank you so much for joining us today, really good insight and really good knowledge for our listeners.
Professor Bill Henderson: Thank you. It was a pleasure being here.
Joe Patrice: Yeah, so if you aren’t listening to this as a subscriber, you should subscribe, that would help. You should also give reviews on whatever service you subscribe through to help us out.
You can read what we write at Above the Law and ATL Redline. We have Twitter handles and all that stuff that you can also find there. That’s pretty much everything I usually say at the end of these shows, right?
Elie Mystal: Pretty much.
Joe Patrice: Yeah, all right. And with that we will be back soon and talk about more, probably, almost assuredly, not nearly as economic-based stuff. So those of you who don’t work in big law, were depressed by some of the numbers we were saying, don’t worry, we will have another episode for you soon.
Elie Mystal: You have got to catch them all, the episodes.
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