A Slice of Information About Corporate Law Firms and Legal Academia

Brian Tamanaha

The National Law Journal recently (Jan. 15, 2007) listed the ten law schools with the highest percentage of graduates hired by the top 250 firms in 2006:

Columbia Law School (69.6%)
University of Pennsylvania (68.2%)
University of Chicago (65.1%)
Harvard Law School (59.2%)
Duke Law School (58.8%)
NYU Law School (56.6%)
Cornell Law School (56.0%)
Stanford Law School (54.9%)
Univ. of Michigan (54.3%)
Univ. of Virginia (54.1%)

These numbers do not count graduates who work initially in judicial clerkships, so the actual percentage of graduates going to these firms is higher. [Yale was ranked 15th, with 46.8%, but many of its graduates enter clerkships.].

A similar table for non-elite law schools (outside the top 30 or so) would likely show that only 5% to 10% of graduates enter these firms, and for many schools the percentage is much lower.

How much do these new graduates earn, and how many hours do they work?

Several top New York law firms just announced an increase in the base pay for first year associates to $160,000, up from $145,000, and other firms indicated that they would match the increase.

A National Law Journal (Jan. 22, 2007) survey revealed that most top law firms paid year end bonuses in 2006 that ranged from $30,000 to $65,000. Several firms pegged bonuses to hours billed. For example, senior associates at DLA Piper who billed more than 2,500 hours could receive bonuses of up to $95,200. [An associate must work about 3,000 hours to bill 2,500 hours, at least for honest billing. Averaged over a period of 52 weeks, not allowing for vacations or holidays, that comes about 58 hours a week. Although 2,500 hours is extreme, it is not unusual for associates at these firms to bill upwards of 2,200 hours.]

First year associates at many top law firms this year will earn in excess of $175,000 (in base salary and bonus). Supreme Court Justices earn $184,400; Federal Court of Appeals Judges earn $159,100; Federal District Judges earn $150,000. Judges on the highest court in the State of New York earn $155,000.

Despite earning more than top judges, young associates at law firms complain that they are underpaid, citing the inhumane hours they are required to work, and the relatively modest sums they earn compared to the million (plus) dollars taken home by partners. Associates point out that 2006 was an excellent year for corporate law firms (with revenue up by 10% in some firms), and feel they should get more of the expanding pie. Partners don’t want to reduce their take, so firms are increasing the number of new hires--the top 250 firms now average 50 new hires each year--as the most direct way to generate additional revenue.

The result: A pyramidal structure in law firms with a large, wide base of young associates working 70 or so hours a week in offices with a thousand or more lawyers. Almost 80% of associates—4 out of 5—leave their firm within the first five years.

Some have argued that this system produces an irrational allocation of talent, time and money. Let’s assume that graduates from the top law schools (and top graduates from non-elite law schools) are the best and brightest in law. Yet much of the work assigned to associates in these firms, at least in the first few years, is mind-numbing drudgery—work that can be done by anyone who is smart and responsible (as many law graduates are). Firms hire top graduates because, as one partner put it: “Our clients expect us to have the highest quality, and they know it takes a competitive compensation.” A more cynical interpretation of what is going on is that law firms hire and churn through top (arguably overqualified) graduates to do mundane work mainly to justify the exorbitant fees firms charge their clients.

There are two obvious winners in this system: corporate lawyers and law schools.

Partners reap oodles of money (though a few resent that they earn less than bankers and CEOs). Associates are also winners—complaints aside, the money is hard to beat—but they pay a price for every dollar they take home.

Law schools are also winners. Tuition at elite private law schools is approaching $40,000. Add another $15,000 a year in expenses, and the cost of a law degree exceeds $150,000 (not counting opportunity cost). Students who borrow to cover their education pay much more. Despite this expense, getting a law degree still pays off handsomely for anyone in line for a corporate law job. For a $150,000 investment, a graduate can earn $800,000 to $900,000 in the first five years alone, and much more over time. Given this expected rate of return, it seems likely that tuition at elite institutions will continue to increase at a solid clip.

This way of thinking, however, forces graduates to take the corporate law firm route, at least for a few years after graduation, as a means to finance the cost of law school. Indeed, this factor probably already contributes to the high percentage of elite graduates currently going to corporate firms. Many students come into law school with different aspirations, and later decide to go to law firms to pay off their hefty loans. Loan forgiveness programs help alleviate some of this (only selected positions qualify), but the financial pressure is still formidable.

Beyond tuition, law schools benefit because many corporate lawyers donate generously to alma mater. The more they earn, the more they are able and willing to give. Law schools work on the gratitude, school pride, and competitive instincts of partners and associates to implore and induce them to contribute to endowments that, for the top schools, already total hundreds of millions of dollars (over a billion for several).

These are comfortable times for elite law schools and their faculties. Although professor pay is not known for private schools, a fair guess is that senior professors at elite law schools earn in the neighborhood of $250,000 (the figure given by Justice Breyer following an informal poll). A recent NLJ report revealed that a significant number of professors supplement their pay by handling cases or consulting on the side.

A few words can be said about the losers in this system.

Judges are not doing well. They do not work the insane hours of associates, but most work hard nonetheless, under trying circumstances. Many are highly accomplished. They play a central role within the system. When evaluated by just about any measure other than hours billed for corporate clients—merit, knowledge, value, experience—it is bizarre that leading judges earn less money than first year associates at corporate law firms.

Many students at non-elite law schools are not doing well. As indicated earlier, only the top 5% to 10% of graduates from non-elite schools obtain the choice corporate law jobs (with a much lower percentage at many schools). The remaining 95% of graduates will earn substantially less initially (many in the $50,000 to $70,000 range), and over their careers. These lawyers mainly serve individual clients or work in government positions. When adjusted for inflation, their pay has decreased in the last couple of decades (see Heinz, Urban Lawyers 2005), while loan payments have gone up.

Tuition increases at non-elite schools have kept pace with elite schools—lagging by a few thousand—so non-elite graduates pay almost the same amount for a law degree but have significantly lower expected earnings. Law school may still be a sound investment for these graduates, but not necessarily for those who had a solid earning potential before entering law school, and not for older students. There is another nasty twist. Many of the top students at non-elite schools—the ones with a decent chance to land corporate law jobs—get substantial scholarships (which schools use to lure highly credentialed students to boost their rankings), while those lower in the class often pay full price. As a result, the students who are likely to earn far less subsidize the education of the students who will earn a great deal more.

Non-elite law schools are in an uneasy situation. Driven by the rankings, they compete for students with scholarships. They compete to hire promising scholars, but lose out to the higher pay and more luxurious circumstances of the elite schools. Many of their students and graduates are unhappy when they realize that their job prospects are not as rosy as they had assumed coming in. Most of the graduates earn less and donate less to their schools, resulting in smaller endowments and heavy reliance on tuition for revenue. Non-elite law schools must raise tuition to compete in the rankings and keep up with top institutions, but earnings for graduates remain stagnant—an ominous combination of factors. Meanwhile, the gap between elite and non-elite widens as the former accumulate a huge resource advantage.

I don’t pretend to know what it all means for the future of the legal profession or legal academia, but one point is clear. A stark differentiation has developed in the legal profession, separating the corporate bar from everyone else, and this is matched by a correspondingly sharp differentiation of law schools. Think about it in loose sports terms: the top programs feed the major leagues, while everyone else feeds the minor leagues, with a few exceptions and relatively little movement across these two differentiated systems. Given this divide, it seems sensible to ask whether non-elite law schools ought to develop a different model of education that better matches the jobs and careers of their graduates.
Posted 3:25 PM by Brian Tamanaha [link]