The Bi-Modal Starting Salary Distribution

My friend Prof. Bill Henderson of Indiana University School of Law has just published a highly significant column titled "How the 'Cravath System' Created the Bi-Modal Distribution." At least one blog ("MoneyLaw") has already deemed it "The blog post of the year;" be that as it may, it's worthy of the attention of any serious student of our profession.

The "bi-modal distribution" Bill discusses is that of salaries of starting lawyers, which for the Class of 2006 looks like this (all diagrams courtesy of Bill):

This is unlike any normal labor market salary distribution I've ever seen. Yes, to be sure, there are the "winner take all" labor (read: talent) marketplaces in industries such as professional sports, celebrity entertainment, and CEO compensation, but those are sui generis for reasons we all understand. What I mean is this is unlike any normal labor market involving tens of thousands of people and not just a handful of superstars.

Even more intriguingly, this is a recent development. Things were not always thus. Here are the graphs for 1991, 1996, and 2000 (the Internet boom, you will fondly recall):

How does Bill explain this? Here's the heart of his theory:

"What are the market forces that have created this peculiar salary structure? In my working paper, "Are We Selling Results or Résumés?: The Underexplored Linkage Between Human Resource Systems and Firm-Specific Capital," I posit that the runaway $160K mode is a confluence of two factors: (1) the continued growth in the corporate legal services market, primarily due to the growing scale and scope of transnational corporate activity; and (2) law firms' nearly universal adherence to the "Cravath system," which purports to hire the best graduates from the best law schools and provide them with the best training."

To understand Bill's thinking there is of course no substitute for reading the primary text, but I'll outline it for you briefly:

• 30, 40, and 50 years ago, firms that were the predecessors of today's AmLaw 100 hewed to the totemic "Cravath system" in ways unimaginable today. For example, a researcher found that in the early 1960's 73% of the lawyers in "law firms" (not solo practice) in Detroit came from Harvard, Yale, Columbia, Chicago, and Michigan law schools.
• The expectation/need of paying top "going rate" salaries to recruit people of that caliber became ingrained in law firm practice and behavior and partner expectations (or, as Bill puts it, "partners remained psychologically wedded to their own perceptions of eliteness."
• This model is becoming increasingly unsustainable.

I have my own take on Bill's fascinating data, which I first posited well over a year ago: The bimodal distribution of starting lawyer salaries is not, economically speaking, an equilibrium condition. It will change.

The last great associate salary spike, from $125Kto $160K, took place roughly 18 months ago when times were flush. Even then, some firms began panting at the effort to keep up. (Recall that the instigator of that spike was Simpson Thacher, which didn't have to raise its resting pulse to manage the spike.)

The next spike—I won't predict when it will be but I will predict it will be to $200K—will leave a lot of firms crying "Uncle." They will stop struggling to keep up with the receding red lights moving on down the highway. And it will be economically rational, geographically defensible, and culturally unifying.