Associate Salaries, Biglaw, Money

Finance And Law: Are Lawyers Overpaid?

Finance professor Michael McDonald explains why lawyers deserve what they get.

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money salary pay raise bills changing hands 100 dollar bills bonusThe answer is…. No. But given recent salary announcements, let’s talk about why. After all, as recent news coverage shows, your clients are surely asking this question — and considering options that might cause attorney wages to fall in the future.

Pay for any group of professionals is often a touchy subject, and that is especially true when dealing with well-educated groups like attorneys. Nonetheless, given the recent trend of large law firms paying their first-year associates as much as $180,000, it’s worth asking the question: are attorneys overpaid?

Attorneys go through three years of law school and four years of undergrad, and thus some individuals who are effectively only just starting their professional careers earn salaries that are considerably higher than other professional groups like nurses and engineers. And if fairness were the only consideration for pay, then one might make a case that attorneys are overpaid. But, of course, that same case would surely apply to professional athletes, Hollywood actors, and many high-ranking executives, all of whom make significantly more than the average attorney.

Instead pay should be based on market wages as a function of supply and demand. And by this measure there is no indication that attorneys are overpaid. In a capitalist system, resources are allocated based on the price that people are willing to pay for goods and services. As long as there is a demand for a particular service, prices should keep rising until sufficient supply exists to meet that demand.

That is precisely what happens in the market for attorneys. There is significant demand for attorneys leading to high wages. Those high wages in turn give many college students an incentive to study law and become attorneys. In some time periods and some regions of the country, the supply of attorneys has outstripped demand. When this happens, many prospective attorneys leaving law school do not get jobs. In those markets, attorney wages rise more slowly (or stay stagnant), and existing attorneys are forced to spend more time and money marketing themselves, which lowers their effective wage rate.

As long as there are no significant artificial barriers that stop attorneys from entering or leaving the market, supply and demand should act in concert to regulate attorney wages. The rise in salaries to $180K annually for some first-year associates is a function of that supply and demand. There are only a finite number of very intelligent and articulate individuals out there – paying those individuals is not going to be cheap.

With all of that said, attorney wages may in the future may actually fall. There are two problems that are exacerbating the issue of wages for attorneys. One is on the demand side and the other is on the supply side.

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On the supply side, many law schools continue to overenroll and produce too many law students. As a result, many graduates from reasonably strong law programs can’t find jobs when they graduate. That puts obvious pressure on wages. As more and more students in the future look for high-paying professional careers and see advanced degrees as a route to future prosperity, that problem will remain acute. This issue is not new, though.

What is new is the trend towards effective substitutes for attorneys. From e-discovery tools to websites offering pre-packaged legal documents, the legal profession is facing greater changes today than it has in decades. Attorneys ignore these trends at their own peril.

How can attorneys combat these dual issues? Perhaps the best solution is price transparency. Effective price advertising gives the customer a clear indication of how much they are paying for an attorney’s services and lets the customer see the value the attorney or law firm provides in comparison to the cost.

Michael McDonald is an assistant professor of finance at Fairfield University in Connecticut. He holds a PhD in finance. Michael consults extensively with organizations ranging from Fortune 500 companies to start-up businesses on financial matters through Morning Investments Consulting. Michael has served as an expert witness in legal disputes, and is an arbitrator with the Financial Industry National Regulatory Authority (FINRA). Michael can be reached at M.McDonald@MorningInvestmentsCT.com.

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