Starting Salaries and the JD/MBA "Substitution Effect," Revisited

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.