The economics of the legal profession make it desirable for law firms and clients to select young lawyers to work on a case. Yet there is no equity between starting salaries and experience at that level. Are there any alternatives?

Not quite one year ago I wrote a column for this publication about the reasons for rising associate dissatisfaction at the major law firms. Since then, of course, it has become the talk of the legal world that the average first-year associate pay at megafirms has exploded to more than $160,000. The Beatles may have been right when they sang that "money can't buy melove," but that kind of compensation for someone right out of law school surely ought to buy some kind of near-term gratification!

What about the Client?

The question is, "what does it buy the client?" Some commentators say that outsized pay to first-years opens up tremendous opportunity for smaller firms with a more "rational" pay structure. General counsel at a number of companies have been quoted as saying that they will not pay for such outrageous salaries when it comes to their legal work. However, an objective observer might conclude that they really don't have any choice but to pay such high rates for beginners.

The simple fact for companies that balk at $160,000 first-year salaries is that their alternative is to pay for mid-level or senior associates making $500,000 a year and more, and partners making $1 million and much more. Perhaps what such clients are really saying is that they don't want to pay for the on-the-job education of these beginning associates; but then again, they really have no alternative because there is no such thing as apprenticeship training for U.S. law school graduates. Many observers have noted that, except for brief summer internships, most U.S. law school students merely read about law rather than practice it. They are ill prepared to negotiate a settlement, interview a client or do many of the other tasks required of a practicing lawyer, unless they learn them on the job.

On-the-Job Training

Until our modern era, most lawyers learned their profession by apprenticing themselves to practicing lawyers, learning from them by watching and doing. It was a system similar to what survives in the medical profession. Doctors, of course, put in years of residency as part of their training. They work in hospitals and clinics, treat patients, observe other doctors as they go on their rounds. Most doctors begin their medical careers with a very good idea of what they will face.

Contrast that to many young lawyers' "apprenticeship" as law clerks in their second or third year of law school. They may clerk at a small firm and spend time photocopying and doing routine office tasks. They may clerk at a large firm, where they do much the same kind of work plus have eight weeks filled with social activities. Then, of course, reality sets in once the young lawyer joins the firm, creating the dissatisfaction that comes from years of grinding away at long hours as each year a new group of graduates arrives.

The Canadian Model . . .

The ideal situation for both young lawyers and clients might be the apprenticeship system found in Canada. Upon graduation from law school, prospective lawyers in Canada begin professional training with the law society of the province in which the student wishes to practice. All provinces require completion of a bar admission course with licensing examinations and a period of practical training under the supervision of a qualified member of the law society, called articling or articles of clerkship. The articling phase is essentially a period of apprenticeship with a law firm, legal department, court or government department. Most large Canadian law firms offer structured articling programs, in which students rotate through the various areas of the firm. The time for completion of the bar admission course and articling varies from 12 to 18 months, depending on the province. Only then are young lawyers ready to practice, either where they articled or with some other firm or organization.

. . . and the American One

The economics of the legal profession in the U.S. simply wouldn't support such a system. Both law firms and clients have the economic incentive to use young lawyers right away. Clients want the lower billing rates; the law firm needs a way to teach new lawyers. If these new lawyers who have no practical experience aren't trained on the job, where will future senior associates and partners come from? With the competition for top law school talent so fierce, and with profits per partner at the 100 largest firms averaging more than $1 million annually, it's a given that the overall cost of legal talent is bound to rise. Associate salaries may be high, but when compared to equity partners' revenue, the percentage is actually lower today than it was only a few years ago. If associates are making a lot of money, partners are too.

The "Magic" of Leverage

That situation is made possible by the "magic" of leverage. Consider a recent NALP study of law firm leverage nationwide from 1995 to 2006, which showed that leverage has returned to levels of the mid-1990s. After reaching a high in 2002 of 1.16 associates to partners, the 2006 figure was .99. Law firms, on a national average, thus paid more for the work being done per hour. Failure to use leverage increases costs of operation.

Such a failure is untenable in today's megafirm world, when the average profit per partner at the 100 largest firms has passed the $1 million mark and when the top 10 firms book profit per partner of $2 million or more. To sustain and expand such financial performance, the megafirms must leverage lower paid associates and cut ties to higher paid but "underperforming" partners, as several firms have recently done under highly publicized circumstances. Such partners were "retired" or otherwise laid off when their firm's overall strategic goal for profitability was not being met. Firm leadership made a change rather than hold on to those partners. Despite the furor, this is a legitimate rearrangement of organizational structures to impact accounting metrics. Why should law firms, now playing in the big leagues with revenues approaching $1 billion, be exempt from the same decisions that face their large corporate clients?

The Root of All Evil?

A final point to remember is that law firms are not trendsetters - they follow those corporate clients. If law firm compensation from first-years to partners is too high, the same can be said many times over for their corporate clients. CEO pay at large companies used to be 10 to 15 times that of the lowest worker; today, with compensation in the tens of millions of dollars, the gap is astronomical. Lawyers must sit at the same table with these highly paid executives, and it follows that if they want their advice accepted they have to be taken seriously. Years ago, my father, who owned his own business, wanted to buy himself a new company car. He wanted a Buick, but one of the senior buyers for a major customer told him he should buy a Continental. Why? "Because you have to impress people like me that you're successful enough to buy from."

No wonder that a law firm unhappy with its profitability would seek to adjust a key economic factor of its operation by eliminating some of its partners and using more first-year associates. That instantly adjusts the leverage! The remaining partners should be pleased that the firm is sensitive to the real economics of the operation. However, they might also want to remind themselves of the Sunday School lesson that not money itself, but the love of money, is the root of all evil.