Christine,

What is your theoretically maximizing student supposed to say when his NY-living counterpart responds with, "well, on saturday, I went to the Guggenheim and saw the brilliant David Smith exhibit, ate at Mario Batali's equisite Babbo (you have to try the beef cheek ravioli) and then stayed out until 3am at Marquis"? That his den fits a big screen tv? That at least it was really hot and humid in houston. Thanks but no thanks.

I agree with Prospective.

Houston? No thanks. How about those shady Enron dealers? You still following the testimony?

Kaminski, there's an honorable name. And an honorable name is worth more than gold.

Houston? Not a good rep. There's something you're selling to take all that money, and you have to live in ... Houston. Too much for me.

Well, the Houston associate will say that she went to the Alley Theater, the opera, an Astros game (or Texans or Rockets, etc.), had really good Mexican food, saw Pat Greene live, and sat outside with friends all night. Of course, the sad thing is that neither of these first-year associates had time to go either the Guggenheim or the Alley. They only had time to go home and sleep for a little while and maybe watch TV. Good thing the Houstonian doesn't have to commute by train.

I don't think Professor Hurt intended to make a, "my town beats your town" type of point, so, with all due respect "Prospective Student" and "X", let's all just acknowledge that "rational" choices for utility maximizers may involve considerations peculiar to the decisionmaker. To some people, owning a home is important; to others, having that ravioli at 3 am is important.

I think Prof. Hurt's bigger point is the (labor) economic puzzle posed here by the Houston raises. Given the unquestioned lower cost of living in Houston (and Dallas), why would a Houston firm ever feel compelled to match a NY salary? Houston firms could probably offer lower salaries than NY without losing more than a handful of future associates from their main "feeder" schools (UT, UH, SMU, Tulane, etc.) to higher-paying New York shops.

One answer might be that Houston has to match order to compete; in the sense that the "match" represents a compensating differential for the lack of 3 am ravioli in Houston. But given the numbers, Prospective Student, you should acknowledge that your ravioli actually costs you about $65,000 a year in opportunity cost. You could live in Houston and fly to NY, stay at the Plaza, and eat that Ravioli at 3 am maybe 20 times in a year (and still have cash left over).

My guess is that Houston's match actually has got more to do with pride than economics (or perhaps, it has to do with the economics of pride). Just like top Ivy league law schools charge $30K in tuition even though they could afford to live forever off their endowments and charge $0 in tuition because they are worried that someone out there might think if something costs less it's worth less, I suspect the big Houston firms aren't really worried about losing associates by not matching. Rather, are worried that if they don't match "people" will start to think of those firms as not being capable of offering the same kind of service that mega-firms in New York are capable of offering.

Christine,

As you might have guessed, I really enjoy this thread. And thanks for doing the math. Yes, I think things have changed.

Geoffrey, ProspectiveStudent's comment is a good answer to the reverse of the question you ask about why Houston firms think they have to match. That question is, why is it that, despite the fact that Houston associates are paid roughly twice as much as New York associates (on a COL-adjusted basis), top law students vastly prefer New York over Houston? The answer may be because, yes, it is worth at least $65,000 to most law students to live in New York over Houston. (As a first-year associate at a NY firm, that's my answer.)

I think the direct answer to your question is a slightly more complicated version of that. The top Houston firms have to compete for some top talent in order to land big matters, and they have to do that by paying a COL-and-hours-adjusted premium over New York rates. To avoid demoralization, and out of tradition, they have to pay everyone in the TX office the same, so the SMU grads at Baker Botts are getting the same as the Harvard grads whom Baker TX lured away from Skadden NY. The lower-ranked Texas firms have to compete with Baker Botts for top SMU grads, so they have to pay $140K or whatever too. Also, lots of national top firms

There's some irrationality here -- people probably don't take COL into account as much as they should -- but it's not as straightforward as Christine suggests.

Re cost of living and $140K going farther in Texas.

A NYC associate is going to get exposure to fundamentally different work in NYC than in Houston or Dallas; and that exposure will open doors (or preserve options) in the future. Better outplacement options warrant a lower cost-adjusted salary. Hence, $140K is the market clearing price in NYC.

In other words, the market may be highly rational.

Prospective student, after you start at the NYC firm, count the number of times you enjoy the perks of NYC versus the number of times you each dinner at the firm (or, worse yet, pull an all-nighter). We tell ourselves stories of why we do things. But fear of walking away from NYC practice--the pinnacle of professional and financial success--explains a lot more. Some people really enjoy NYC practice, but many others are just afraid to pull the string. Obviously, deciding to take $140K in Texas is one way to bow out of the tournament gracefully.

Of course, to do the math, you have to project compensation over time. I wonder, for example, if Houston parnters make as much as partners in other big cities.

In any case, I think you can't maximize welfare without considering other intangibles, such as the type of work you get. For example, Houston may be the zenith for energy law, but if I really want to practice Internet law, I'm probably going to have to scrutinize Houston carefully.

Eric.

If the partnership is voting on the raises, doesn't it also matter how the calculus works? If Smith law firm in Texas has a 100 member partnership, and they hire "a" new associates per year, and they lose "b" senior associates per year, and they make "c" new partners per year, and they are taxed at "y" rate, and they bill at "z" rate, and their partners average huge numbers in salary per year, and the partners are all paid lockstep, isn't there a number at which the partners look at each other and say "giving $[]0,000 extra per year to each associate costs me (after taxes and billing changes and cost allocation strategies and partnership draw and long division and all that) $83 out of my pocket. Fine. That is a cheap price to pay to quickly put to bed any public debate about why we pay our associates as we do. If that is what it takes to keep our firm up in the top tier of associate pay, fine."

I'm thinking back to the craziness of what firms used to pay to score a former Supreme Court clerk. When I was in law school, the calculus from the firm side was incomprehensible to me. Was a Supreme Court clerk *really* worth a $30,000 bonus when the law firm could just as easily hire a nice 9th Circuit law clerk who was not lucky enough to get an S.Ct. clerkship but who was likely just as smart? You could *save* $30,000 by hiring the 9th Circuit law clerk who could likely do the "junior associate" tasks (discovery document review, legal memos, drafting potential deposition questions, etc.) just as well!

In hindsight, the economic reality seems to be that it didn't much matter. $30,000 to me is different than $30,000 (after taxes, blah, blah, blah) divided among 150 law firm partners most of whom have broken into the 7 digit salaries.

Elizabeth, partners don't vote on associate raises. In the least democratic firms, partners are like employees, and know very little even about each others' compensation. (When I was a law firm partner, the best example of that was Jones Day, when Dick Pogue, as the executive partner, set every partner's compensation, and nobody knew officially what anybody else made.) In the most democratic firms, the partners all know what each other makes, but partner compensation is generally set by a committee (somewhat) democratically elected by the partnership. While "oh my god, look what we are paying starting associates" was always an interesting topic, and of great concern in my day to senior associates and young partners who were affected by compression, we were as much spectators to the associate salary-setting process as the National Law Journal.

Having said that, the underlying point of your analysis may be right: when we look at next year's operating budget for the firm, raising starting salaries by, say, $20,000 is a drop in the bucket compared to the multi-billion dollar revenue business that is a 1,000 lawyer firm today. Assuming it is a drop in the bucket. What I observed in the mid-1980s, at least in the big midwest firms, was salary compression. Whereas, once a jump in starting salary meant a corresponding windfall all the way up the line, at some point, salaries started to compress, so that the gap between the average starting associate and the average fifth or sixth year associate started to shrink.

Personally, I think it's a big multiplayer Prisoners' Dilemma from the client level on down. Nobody out of law school is really worth that much, but no law firm is worth that much either. If we could just manage to coordinate, we'd eliminate all the lawyers, and then all the new associates. But we can't or won't, so we play Prisoner's Dilemma on the not so odd chance that the other guy will get the jump on us.

Compression is a huge issue in the salary process, particularly at mid-size firms that may pay top-market prices at the early end, but then taper off as you raise in seniority. Prof. Lipshaw is also quite right about the perspective of the partners (it isn't that much marginal cost per partner and it is a gigantic Prisoners' Dilemma).

But's also the first pay increase in 6 years (though that was a large one) and outside of NYC, a slight increase in hourly rate pays for it (IF the firm can actually collect that extra).

From the recruitment side, that extra money can make a big difference. Tuition is, after all, $36 - $39,000 at top private schools - up 30% from 4 years ago.

Hey Prospective Student,

Have you managed to score reservations at Babbo?

Nah; it's better to just go around 10 or 10:30pm and wait about 30 mins at the bar. Full menu and there are tables in the bar area. It's really nice.

I've lived in Houston and New York, and am an equity partner in a well-known east coast law firm. While I think it is futile to fight market forces on associate salaries, and right now the legal business is booming, I'd make a couple of observations:

1. Both Houston and New York are interesting places to live, each in their own way.

2. But you are more likely to get better experience in your specialty in New York. The best clients with the most interesting work still take it to the big NY firms, followed by firms in DC, then LA, and then all the rest of the cities. And while there are brilliant lawyers in the big Houston firms, the difference is that in the big NY firms, a higher percentage are brilliant, and because of the nature of the work will have more experience in the tough problems. The difference is more pronounced in corporate work, where there is simply no comparison between practicing in NY and practicing anywhere else. Anything said to the contrary is law firm marketing puffery. Perhaps this is less true for litigation. But overall, better training in New York.

3. A dollar will go further in Houston than NY, principally due to housing, but if you are not driven to have a big house, it may not matter as much to you. However, associates are held to a high billable hour requirement in every major city. I think the purported differences in quality of life among big firms in different cities are more imagined than real (though a handful of firms really are miserable places to work, of course, I think those exist in all cities).

4. If you are already an associate in Houston and thinking of lateralling to a better place, now might be the time to lateral to New York. The first 3 years from entry level associate are the worst and most grinding in a New York law firm. Avoiding them will make your experience better.

5. I still believe that it is easier to get a good job leaving a NY law firm than a Houston one. Admittedly, I have nothing to base that on but my perception. On the other hand, you might like it and stay.

6. I don't begrudge associates their money, but I feel a little sorry for one of the effects of salaries having gotten so high. It has definitely cut down on the practice as recent as two decades ago of putting associates on projects just to give them experience. I learned a lot that way. Billable rates are now to high to justify that. Consequently, it hurts their training.

For one who has access to this level, I would expect that use of the English language would be commensurate: " . . . me and my husband " is at the $20,000/year level.