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Is All That Associate Salary Green Nothing More Than a Red Herring?

Red and green are the hues of the holiday season, so it's not surprising that they color Bruce MacEwen's end-of-year opus, A Compensation Meditation.  As I read it, MacEwen's musings boil down to this: For all of the griping that enormous associate salaries generate, when viewed under the harsh light of rigorous economic analysis, associate "green" is nothing more than a red herring.

In his post, MacEwen tackles the "maddening" (his words) complaints over rapidly increasing associate salaries (we've discussed some of these issues previously at Blogwatch, here and here). For those who claim that "first years can't possibly be worth the amounts they're paid," MacEwen responds that comparative pricing, such as comparing the cost of a first-year at a large firm versus a law librarian, "confuses the presumed social benefits conferred by a slice of the labor market with what society at large ought to be willing to pay those who have chosen a career there."  Markets and business don't work that way, however, so law firms base salary on the expected return that the firm hopes to earn on the associate's labor over time. 

Moreover, as firms have increased in size, so too has the demand for associates from the upper ranks of top-tier schools, thus driving up the price for talent.  You can argue, as would I, that a far larger number of law school graduates than the top handful from elite schools, can excel at large firms and even perform better than their more well-credentialed peers.  But apparently, law firms aren't buying that argument, which accounts for today's scarcity-induced salary increases.

Next, MacEwen reaches what I consider the most compelling argument against associate salaries:  client complaints that salaries are too high. To this, MacEwen exclaims that "the only intelligent response to this is, 'Snap out of it!'"  He writes:

No sensible buyer cares about the cost of each, or any, specific component of what they're contemplating purchasing; they care about value for price(emphasis added). Here's a  concrete example:  If I'm debating whether to buy a BMW or a Lexus, do I care what the factory-line workers get paid?  For that matter, do I care what each CEO gets paid?  Not unless I'm hyperventilating about some tendentious socioeconomic cause—in which case we can stipulate my purchasing decision will not be made on the merits of value for price.

Because MacEwen sees no rational basis for clients' obsession with associate salaries, he hypothesizes that the reasons are psychological: In-house counsel are jealous and resentful that newbie biglaw associates earn more than corporate lawyers. 

MacEwen got it right when he said that "clients care about value for price" and that corporate counsel are resentful.  When a client pays for a new associate who took 80 hours to complete a task that an experienced lawyer could have dispatched in a fraction of the time, clients don't see value, they see billing abuse -- which is why they complain about price.  And if corporate counsel are resentful, perhaps it's because they believe that law firms are passing on the higher rates that they pay for new associates, without conferring any added value.

Complaints over associate salaries aren't a red herring at all.  Rather, they're symptomatic of a larger, growing perception among corporate clients that law firms aren't delivering sufficient value to justify the rates that they charge.  Seems to me that the quickest way to eliminate complaints about associate salaries isn't to educate clients about the law of supply and demand, or worse, to shut them up.  It's to deliver enough value so that price, quite simply, is no longer an object.

Posted by Carolyn Elefant on December 26, 2007 at 02:08 PM | Permalink | Comments (0)

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