Wednesday, February 7, 2007

Days of Whine and Roses, or the Strangled Cries of Lawyers in Love

Posted by Jeff Lipshaw

David Luban at Balkinization has a Marxist take on the economic structures of law firms.  (HT to Brian Leiter at our sister blog within the growing Caron empire.)  More precisely, it's a worm's-eye view (as William Baxter said of Gilbert's on Antitrust on the first day of class) of very large financialMarx center law firms with staggering first year associate pay and high associate to partner ratios.  And guess what?  The partners make a lot of money off the backs of the highly paid associates!  (This, by the way, did not originate with law firms.  Any service firm, including the large accounting firms, work the same way.  Ask my wife, who was a FYP ("first year person") at what then was called Arthur Young & Co.)

You have to scroll through the comments to get a balanced view of this.  And, in the interest of full disclosure, I come at this as someone who had the worm's eye view, the bird's eye view, the partner's eye view, the of counsel's eye view, and the client's eye view.  The only view I never had was the rainmaker's eye view.  On the other hand, when I was the client, I got to have the rainmakers suck up to me, and some of them became my friends, so I have privileged access to the dark places in their souls.

So here are some observations about what is right and what is wrong:

1.  There is or at least was a significant difference in associate-partner ratio in the "fly-over" parts of the country.  While that may have changed over the last twenty years or so, I think in the midwestern large firms associates are still hired with the expectation that they will become partners.  My guess is that natural attrition pares the group down to the point that you don't have a Ponzi scheme - i.e. that the firm has to keep doubling in size to keep the associate-partner ratio at about one to one.

2.  The commenter about "service partners" is on the money.  The real divide in a law firm is not between partner and associate, but between net takers and net givers.  I guess if the leverage ratio is so high that immediately upon becoming partner you are raking in money faster than you can spend it you don't notice this, but net-net, when I became a partner in 1987, what with self-employment tax, capital contributions, paying for my own parking, borrowing to make up for the lack of special distributions, if the cash flow wasn't there, around estimated tax time, I'm pretty sure I made less in the first year of partnership than I did in the last year of associate-dom.  The line between net takers and net givers can be masked as well by partnership structure and compensation policy, i.e., multi-tiered partnerships, equity partners, salaried partners, base point systems with discretionary bonus versus straight return on equity.

3.  The commenter who says it's a free country is on the money.  It's quaint now, but when I graduated from law school in 1979, you could go to Detroit and make a base pay of $22,000, to New York and make a base pay of, as I recall, about $30,000, or become a consultant at Bain and make $44,000.  Even then you made a life style choice, and traded money, prestige or whatever the Cravaths of the world offered for whatever the Detroits, or St. Louises, or Pittsburghs of the world offered.

4.  The commenter who notes that there is something, let's call it a brand, that makes an associate worth all that pay because of the brand (and not just the associate's labor) is on the money.  The associate contributes to the maintenance of that brand, as do the partners, but it's a nice and touchy question when the lawyer or the brand is worth more.  When David Boies perceived himself as more valuable than the benefit that the Cravath brand bestowed upon him, he left.  The same applies to Fred Bartlit and Kirkland.  (That's an oversimplication but I think it's basically true.)

If I were to put some social science jargon around what's going on here, I'd forsake the Marxist economics, and go with path dependency.  And view the bitching and moaning as the voices of those stuck in the path.  Or go with Jackson Browne's take:

I can't keep up with what's been going on
I think my heart must just be slowing down
Among the human beings in their designer jeans
Am I the only one who hears the screams
And the strangled cries of lawyers in love

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Lately there has been a lot of buzz in the blogosphere on the associate-partner pay gap (Lipshaw, titled The Days of Whine and Roses), the application of Marxist economic theory to the corporate law firms (David Luban), and what all [Read More]

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