"Clients Wont Pay For What Law Schools Churn Out"

cartera45 · December 5, 2011, 1:10pm

Some believe that, based on partner profits, associates in biglaw are not paid enough.

[Bonus</a> Time?And Another Unfortunate Comment Award](<a href=“The Am Law Daily”>Bonus Time—And Another Unfortunate Comment Award)

sakky · December 5, 2011, 5:34pm

Hey, based on Microsoft profits, I would argue that Microsoft engineers are not paid anywhere near to satisfactory. After all, Microsoft is one of the most obscenely profitable firms in the world.

Yet biglaw associates are apparently able to claim a bigger share of their pie than Microsoft engineers can. Good for them, but that still raises the question - what’s their secret? What do they know that Microsoft engineers (and engineers at Intel, Cisco, IBM, etc.) apparently don’t know?

sunfish · December 6, 2011, 2:33pm

Isn’t it really foolish of the Teachers Union and UAW to spend millions on PR and lobbying when all they need is a couple of mils to hire Billy Hunter?

sakky · December 18, 2011, 4:16pm

Well, it’s not just Billy Hunter alone, no matter how savvy he may be as a negotiator (I would actually argue that Don Fehr or Michael Weinstein are better examples, as they run the most powerful sports union in the world). The teachers unions and the UAW would need to replicate the entire sports union infrastructure. After all, even if Billy Kidman were to retire tomorrow, the NBPA would still be a powerful union.

But at the same time, let’s not overly denigrate the strength of the UAW or the teachers unions. During its heyday of the 1960’s to 1980’s, the UAW delivered one of the best deals in modern labor history, where workers, without needing to ever attend college, could nevertheless enjoy gold-plated health care, pensions, and wages lavish enough to purchase second homes and boats on Lake Michigan, during a time when the Big 3 automakers were becoming notorious for producing famously unreliable vehicles such as the Vega that inflicted immense damage to the reputation of the US auto industry and trained an entire generation of American consumers to prefer foreign cars. Not only that, but the UAW also negotiated a ‘jobs bank’ by which thousands of ‘laid-off’ auto workers would nevertheless be paid to attend a special union office where they could sit around and read magazines or watch TV all day long while continuing to draw a paycheck until such time as a new auto job opening was created. In other words, the Big3 were producing absymally low-quality products while its blue-collar workers continued to enjoy excellent pay and working conditions - all due to the workings of the union. Granted, it could never last, and union conditions have indeed been radically reduced in the last few years, but while it lasted, it is clear that auto workers were enjoying one of the best deals in the world. Produce a terrible product, but get paid well anyway.

The same could be said for the teachers union. Let’s face it - the performance of American students is rather mediocre relative to that of most other developed nations. Yet teachers enjoy summers off and many of them (depending on their school district) after a few years are provided with tenure which makes them effectively impossible to fire. From 2007-2010, only 88 teachers in the entire New York City school system were fired, yet there are surely far more than 88 poor teachers within that system of a total of 80,000.

Now, to be clear, I am not saying that auto workers or teachers do not necessarily deserve the work conditions that they obtained. Maybe they do, maybe they don’t. That’s a judgment call based on values. But what is clear is that auto workers and teachers have been able to enjoy working conditions vastly improved over their peers, almost certainly because of the intervention of unions. After all how many people, either in the 1970’s or now, who never went to college are nevertheless able to afford second homes and excellent pension benefits? How many newly minted college graduates are able to find a job that gives them summers off and the opportunity for tenure after a few years? {Contrast that with private sector employers which will readily lay off thousands of employees regardless of their experience level.} Let’s face it - they have a deal that many other Americans can only wish they had, and unions are probably the reason why. Good for them.

Which makes it all the more intriguing that new biglaw associates are also able to obtain high salaries…without the intervention of unions. Why and how? I think we’d all like to know their secret. After all, we have all agreed (and nobody has disputed) that they are not actually profitable, defined as, on average, not generating sufficient revenue to cover their costs. So why do they keep getting paid so well?

sakky · December 18, 2011, 4:29pm

And to be clear, even if we assume that associate salaries must move in lockstep (which I would dispute), that doesn’t answer the question of why the lockstep increments must be only $10-15k. Why not have brand-new associates be paid, say, $80k (or whatever salary is commensurate with the revenue they generate), and then have large lock-step increments of, say, $30k, for each additional year until the 4th year, after which the step increments can be reduced to $10-15k?

So let them. What’s wrong with that? If they want to jump to a competitor who is willing to overpay for them, fine, let them. As we’ve all agreed, those new associates aren’t profitable at high salaries anyway. If a competitor firm wants to waste money, that doesn’t mean that I should do likewise, just like if my friends jump off a bridge doesn’t mean that I should too. After the 4th year, upon which those associates’ productivity can now justify their costs, then I raid my competitors by offering comparable salaries. But until that time, wouldn’t it be economically rational to stick my competitors with the unprofitable ‘training cost’ of the first 3 years of associate work, rather than paying for it myself?

Of course that all presumes that law firms are indeed behaving economically rationally. If we lift that assumption, then we can examine social and psychological explanations which is where I suspect the answer lies.

zaprowsdower · December 18, 2011, 8:55pm

So how many industries, exactly, are totally irrational? It seems like it’s at least law, accounting, consulting and pretty much the rest of the financial sector.

Which is probably what a law firm would tell you, too, particularly if it’s a biglaw firm, since they also have fixed salary structures. Most associates are gone within five years and firms generally do nothing to stop them. Do engineering firms really comprehensively re-evaluate their starting salaries every year, but without any consideration of what their peer firms are paying? Do they never raise salaries to gain a recruiting advantage over other similar firms?

Well, from 1967 to 1986, the starting salary at the biggest firms increased by over 600%, so again this “recent explosion” actually seems pretty minuscule.

Maybe because eliminating their (relative) stability and predictability would make it even harder for them to compete with the finance and other fields.

And free agency. And a massive increase in revenue for clubs, including from TV deals that were a little hard to come by in Cobb’s era. Again, this is an explanation that completely ignores the underlying economics of an industry.

This is how a lot of smaller firms and most in-house legal departments function. Many of them hire few or no recent grads. It wouldn’t make a lot of sense to raid other firms for a ton of experienced attorneys when most of what you need them for is menial due diligence/doc review.

Again, much of the work really doesn’t require training, and they bill the clients to recoup the costs. It would make no sense to bring on experienced associates to do doc review. For associates you want to handle more substantive work, it’s preferable to train them yourself, and have them develop relationships with your clients and other attorneys.

sakky · December 19, 2011, 1:25pm

Frankly, I would say that almost every industry are ‘irrational’ in the sense that compensation within any particular firm is driven by social and political rather than purely economic forces. That’s why I even hesitate to use the word ‘irrational’, for that implies that firms are somehow behaving insanely. In fact, they may be behaving quite sanely, given their social environment (which itself may not be sane).

As a case in point, why is it that managers of US firms are paid significantly higher than their counterparts in, say, the UK, Germany, France, or Japan? Are US managers truly that much more productive than their British/French/German/Japanese colleagues? Or is it simply a product of the fact that American culture tolerates higher wage differentials and social inequity than do those other countries? Heck, we’ve reached such ostensibly ‘irrational’ absurdities as local US division heads of foreign multinational firms often times actually being paid more than their bosses, the (foreign) CEO’s of that firm.

[European</a> CEOs make half the pay- MSN Money](<a href=“http://articles.moneycentral.msn.com/Investing/CompanyFocus/EuropeanCEOsMakeHalfThePay.aspx]European”>http://articles.moneycentral.msn.com/Investing/CompanyFocus/EuropeanCEOsMakeHalfThePay.aspx)

Here’s another one. Why is it that, after 1993 when the Clinton Administration instituted a tax deductibility threshold of CEO pay to $1 million above which only performance-incentives would be tax deductible (when beforehand the entire CEO compensation was tax deductible), did CEO’s now begin to negotiate for $1million as minimum base salary (when before, CEO base pay for many firms was far lower)? After all, the firm gains nothing from precisely matching that price point; all that the firm should rationally care about is the total amount it must pay to both the CEO in compensation and to the government in taxes.

Did CEO productivity all ‘coincidentally’ change at the exact same time as the tax reform such that all of them could rationally justify a $1 million base salary? Or did the regulation ironically establish a psychological price-point that $1 million salary was what ‘real’ firms pay their CEO’s? If so, keep in mind that psychological price points are not rational.

As a practical matter, the law’s requirement of performance criteria for deduction of pay above $1 million quickly established $1 million as the minimum base pay any self- respecting CEO expected from a major corporation.

[How</a> Bill Clinton Helped Boost CEO Pay](<a href=“Bloomberg - Are you a robot?”>Bloomberg - Are you a robot?)

one unforeseen development was that the $1 million cap became the de facto floor: No self-respecting CEO wanted a salary below the level that the government had set as a cutoff point. So even without the tax deduction, corporations just blew through the $1 million barrier anyway.

[RealClearPolitics</a> - Excessive CEO Pay and Job Losses: Are They Linked?](<a href=“http://www.realclearpolitics.com/articles/2011/11/05/excessive_ceo_pay_and_job_losses_are_they_linked_111950-3.html]RealClearPolitics”>Excessive CEO Pay and Job Losses: Are They Linked? | RealClearPolitics)

Hence, given that CEO salaries are not entirely rational, is it truly surprising that biglaw associate salaries may not be entirely rational either?

I never said that engineering salaries were entirely rational either. In my opinion, they’re irrationally low.

But that only speaks to my general point: many (almost certainly most) compensation in most industries is irrational, in the sense that they are driven by social and political forces. For some reason, it has become socially and politically acceptable for associates, at least in BIGLAW, to become far more highly paid than most other professions and even other lawyers not in biglaw. {As a stark example, surely you realize that first-year biglaw associates are now paid more than even Federal judges.}

starting associates were starting at $160,000, plus giant bonuses, and lots of holiday swag, and then went on to $180K, and were thus clobbering the salaries of New York state judges who remained stuck at $136K and federal judges who were getting $162K

<a href=“BigLaw Associates "are overworked and underpaid" (You Gotta Be Kidding Me!) - Updated! - New York Personal Injury Law BlogNew York Personal Injury Law Blog”>BigLaw Associates "are overworked and underpaid" (You Gotta Be Kidding Me!) - Updated! - New York Personal Injury Law BlogNew York Personal Injury Law Blog;

Really? You have evidence of this? I presented evidence of the increase in pay from 1996 onwards. I think it’s only fair that you do likewise.

But even if what you’re saying is true, then that only modified the question: why have biglaw associate salaries increased so remarkably from 1967 to today? Did associates truly become far more productive and better-trained during that time span? Or does it have more to do with changing social factors?

So let those associates leave for those other fields. As I said before - and everybody here seems to agree - new biglaw associates are unprofitable anyway. If finance firms want to waste money on them, fine. Just because other people jump off a bridge doesn’t mean that you should do the same.

No, I entirely respect the holistic economics of the industry, if by that, you mean the socio-political forces surrounding baseball.

Take your example of baseball free agency. Free agency was implemented in 1974 only through a long-running battle with the player’s union. Let’s be perfectly honest - without the player’s union, players to this day might still be consigned to the strictures of the reserve clause and therefore would have been denied the lion’s share of the explosion of TV money (which had actually began to flow in decades before the institution of free agency).

Hence, the example of baseball actually (ironically) vindicates my point. Market forces can only explain the total pot of revenue that flows to a particular industry. But how that pot is then divided amongst the individuals within the industry is ultimately the product of a socio-political conflict. When the MLBPA did not exist, superstar players such as Cobb and Ruth were paid relatively little. Nowadays, because the MLBPA is widely credited as arguably the strongest union in the nation, even mediocre players can be paid more than Ruth (on an inflation adjusted standpoint). To assert that the internal socio-political forces such as unions play absolutely no role whatsoever in determining player salaries is to deliberately ignore the holistic ‘economics’ of the industry.

Which only makes the large biglaw associate salaries all the more intriguing, because they have no union. Yet they were somehow able to attain high salaries anyway. That would seem to be the makings of a truly brilliant strategy - earn high salaries that are far above your worth (for, as was established, new associates are unprofitable), all without having to pay union dues or risk being unpaid through official work stoppages (baseball has undergone 8 stoppages through union strikes or owner lockouts since 1972). How did they do it?

So why does biglaw need new associates when apparently small firms can do without?

No, again, like I said, what you bill the clients has no direct relationship with how you choose to pay your employees.

Let me put it to you this way. Law firms generally employer plenty of people other than merely attorneys: IT staff, secretaries, and the like. Their services are not ‘billed’ to clients. But the law firm still pays them, don’t they? Obviously they’re not working for free. What that demonstrates is that there is no clear relationship between how you choose to bill a client and how you then pay your staff. Market forces may determine whether clients choose to hire your firm and the fees that they pay. But how those fees are then distributed within the law firm is determined by an internal socio-political battle, which the clients don’t know about and don’t care. All they care about is that they are receiving the legal services that they paid for, and if the law firm then decides to pay million-dollar bonuses to its secretaries or spend it on some wasteful junket for the partners, hey, that’s not the clients’ problem.

Here I think you are arguing that new biglaw associates are in fact profitable, in direct contradiction to the unanimous verdict here on this thread. Is that what you are saying?

cellardweller · December 20, 2011, 2:59pm

Throughout this discussion we have essentially taken for granted that $160K/year is actually a lot. But is it really?

To answer that question one needs to understand the business model of the modern law firm which is based on the paradigm of the “billable hour”. For those interested here is some background on its history.

[Legal</a> Affairs](<a href=“http://www.legalaffairs.org/issues/September-October-2002/review_kuckes_sepoct2002.msp]Legal”>Legal Affairs)

First, the billable hour did not become truly dominant until the mid-70s, when it replaced the more common retainer type agreements.

2,000 hours does not seem like a lot, it is only about 8 hours/day, 5 days week with 4 weeks vacation. But these are not all billable hours.

the 2,000 billable hour quota is just the low end. Bonuses typically start at 2,000 hours and go up from there. If you really want to make partner you may have to put in more like 2,400 billable hours representing 3,600 office hours.

That’s not all. If the associate wants any chance to make partner he also has to spend time on client and professional development.

That’s another 400 hours minimum.

In the end, an associate may have to work at least 4,000 hours/year or 80 hrs/week to be in position to make partner. At $160k/year that is barely $40/hr. Even if he gets a bonus we are still talking less than $50/hr, hardly a windfall.

One could argue that medical residents also put in a minimum of 80 hrs/week during their residency and get paid less than half of what associates at big law firm make. That is true but residents typically get other benefits such as subsidized housing, free meals, insurance and so on. Also, it could be argued that an associate position is inherently more risky than that of a medical resident. The hard part is getting the residency, but once you have it, very few don’t succeed at getting certified in their specialty and getting good permanent position at the end. Associates have much lower odds of making partner and therefore the higher risk is translated into a higher salary.

There is a lot of debate as to whether the billable hour business model needs a serious rework, and there is clearly a trend in that direction with fixed fee arrangements and retainers for certain areas such as tax law, Intellectual property and even M&A work.

sakky · December 20, 2011, 5:52pm

Actually, it’s a tremendous amount, when viewed from the purely economically rational, market-driven approach that my detractors continue to invoke. Your entire analysis is predicated upon the notion that salaries are determined solely by how many (billable) hours you work. But this is no different from the ‘labor theory of value’ that has been discredited by mainstream economists for centuries (although admittedly still holding sway amongst heterodox Marxist economists). Rather mainstream economics would maintain that wages are ultimately determined by the demand for the services that you provide, not the time spent to create those services. A supergenius Tony-Stark-esque engineer who can invent a flying car in the space of an hour can reap millions in profits, but if I spend my entire life trying to build a new technology but never succeeding, then I receive nothing. It doesn’t matter how much time I spent; all that matters is that I created no value.

Which returns us back to the point that I’ve made before which heretofore still has not been seriously challenged: new biglaw associates are unprofitable in the sense that they earn salaries far in excess to the value that they provide. And not just for an initial month or two which could perhaps be attributed to a standard training & integration ramp-up period, but probably for several years. I believe somebody on this thread mentioned that biglaw associates become profitable around year 3 at the earliest. Therefore it doesn’t matter how hard those new associates work, all that matters is how much value they provide.

I therefore must ask the question again: why are new biglaw associates paid so well? Specifically, why do biglaw firms continue to pay them in excess to the value that they provide? Do biglaw firms enjoy losing money?

Naturally that entire analysis rests upon the assumption that the biglaw employment practices are entirely economically rational. That assumption is questionable at best, for the fact is, most organizational practices are not entirely economically rational, but are accompanied by strong - sometimes overwhelming - social and political pressures. {Like I said, why are American managers paid so much more than are European and Japanese managers when there is little reason to believe that American managers are actually more competent than their counterparts? In particular, why did the management of GM and Chrysler continue to be paid better than that of Japanese car firms, all the while leading GM and Chrysler into bankruptcy? }

But what makes biglaw associate salaries so intriguing is that usually irrationally high salaries accrues to victors of the internal political jockeying within a particular firm. Let’s be perfectly frank - employees at any organization spend significant quantities (sometimes the majority)of time not serving customer demand but rather engaged in the intrigues of office politics, which then determines promotions and salaries. Savvy office politicians (sadly but unsurprisingly) extract salaries far in excess of their worth.

But brand-new associates have no internal political standing, as far as I can tell. Nevertheless, they’re still paid far in excess of their worth. How and why?

To reiterate, whatever ‘billable hours’ may appear on the clients’ invoice doesn’t matter for the purposes of who gets paid what. Just because an associate may bill a lot doesn’t necessarily require that he be paid a lot. After all, after the clients pay their fees, they don’t care what happens to the money, which now belong to the law firm to dispose of as it pleases. If the firm wants to take those fees to pay million-dollar bonuses to its janitors while shafting the associates, that’s not the clients’ concern.

cellardweller · December 20, 2011, 7:03pm

Well, I challenge the proposition that they are unprofitable. Let’s just run the numbers!

Assuming an associate billing even a lowly 1,800 hours/year which would be a bare minimum. Let us also assume that the corporate overhead on the $160K/year associate is a full 100% which is certainly on the high side (the average overhead for attorneys is closer to 50% of income) bringing his fully loaded cost to $320,000. In order to break even on the cost of the associate the firm would need to bill out at at least at $175 which is very low for biglaw. According to a Survey by the National Law Journal, the median billing rate is $205 nationally for associates and the range is $175-300. In New York, the median billing rate is is closer to $250 for associates with $300 not uncommon. So the firms are actually making a profit even when paying the mediocre associates the top salaries and bonuses. The more productive associates are even more profitable.

The only situations where a firm would actually “lose money” on an associate would be in the event of over-hiring and not have enough paying clients to spread the billable hours across. This actually did happen with some firms in the past few years, and the immediate response has been to lay off associates or simply defer new hires as happened in the 2008-2010 period. The market response has actually been very rational.

In an industry where quantity of output is the single measure of performance and where quality is essentially irrelevant, the compensation scheme is actually highly rational. There is absolutely no incentive to do a better job or to hire higher performing associates who can complete the job faster: such associates would actually make less money for the firm under the current system. You want drones who can work until exhaustion and generate substantial revenue for the firm at a relatively low cost/hour. The proposition that law firms lose money on associates is just a myth! They are the workers bees that partners need to leverage. An associate who can’t bill the minimum hours is simply cut.

sakky · December 20, 2011, 8:36pm

Unfortunately, no, that’s not how you would calculate the figures, for as I’ve stated repeatedly: billing is just an artificial accounting construct. That’s because biglaw legal services are a package deal for which the client is not allowed to choose a-la-carte but can only select an entire prix-fixe meal (or else not purchase at all).

As an example, McDonalds could in principle take a $5 Big Mac and, for the purposes of accounting, “divide” the costs to the customer in any number of ways. Heck, they could “bill” me with an invoice stating the pickle costs $4.99, and the rest of the sandwich costs $0.01. But that’s merely an accounting fiction. It doesn’t mean that the value of the pickle is indeed $4.99 , nor does it mean that I could choose to buy a pickleless sandwich for 1 cent. If I want the sandwich, I have to pay the entire $5, and how McDonald’s might allocate the costs for accounting purposes is irrelevant. {Heck, even if I order a pickle-less Big Mac, they’re still going to charge me $5.}

The real question is therefore exactly how much value are the new associates truly adding to the entire ensemble of legal services provided to the clients. And let’s be perfectly honest, the partners, along with the senior associates, are adding the vast bulk of the true value. That’s what the clients are truly paying for. In the same way, the ‘real’ value of the Big Mac probably lies in the meat, bun, and the McDonalds ‘secret sauce’. That’s what I’m really paying for, and the value that the pickle adds is negligible.

Put another way, how many people would truly pay $4.99 for a standalone Mcdonalds pickle slice without any of the rest of the sandwich? Probably nobody. By the same logic, how many clients would legitimately pay $250-300 (or, heck, even $175) an hour for a brand new biglaw associate without any accompanying work from any partners or senior associates? Again, probably nobody. But why not - after all, if the service was truly fairly priced, then customers would happily partake, right? In both cases, clear overpricing is occurring. I would pay that $4.99 for the overpriced pickle only if I could get the rest of the sandwich for a total of $5, and similarly clients tolerate paying overpriced new associates only to obtain access to the rest of the biglaw service bundle.

That clearly demonstrates the artificial accounting nature of these billing rates. How firms choose to bill their customers has no direct relationship with how they then choose to pay their employees.

cellardweller · December 20, 2011, 10:18pm

What I challenged was the myth that associates are not profitable to law firms: they certainly are and provide the partners with the bulk of their profits.

I don’t disagree with that. The fee charged may have little relationship to the value of the benefits received by clients. This is a direct by-product of the billing by the hour model that has become the norm. For more detail on the specific advantages and disadvantage of the model you may want to read:" Billing Innovations: New Win-Win Ways To End Hourly Billing" by Richard Reed.

But to understand how we ended up there, you first need to understand how the hourly billing model developed and how successive courts screwed up the system.

The ABA Rules of Conduct state that 8 factors should be used in determining the reasonableness of a lawyer’s fee:

<a href=“1”>quote</a> the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and
(8) whether the fee is fixed or contingent.

[/quote]

Interestingly, “the amount of the fee in proportion to the value of the services provided” is not one of the standard ABA factors, although it is in the California version of the Rules.

These are all a-priori reasonable factors. This should allow top lawyers to charge more than bad lawyers and to charge more for high value services than low value services. But that is NOT how courts, including the Supreme Court, have interpreted the rules. In a key case, Blum vs Stenson, in 1984, the Supreme Court determined that the proper first step in calculating a fee is to multiply the number of hours reasonably expended on the matter by a reasonable hourly rate. Virtually all of the ABA factors were subsumed into the hourly formula. Any upward adjustments in the fee are allowed only in rare and exceptional circumstances. This pretty much killed off value-based billing! Law firms were pretty much stuck with billing based on standard rates with the total fee independent of quality of work performed, but just based on quantity of work.

This mess has progressively led where we are today where hourly billing rules and clients often have no way to ascertain total amount of charges. No wonder they resist paying for the high cost of legal services. There are also downsides for the law firm which cannot charge a partner’s time at a higher rate for high-value or high-responsibility matters.

This is turn has led to the development of tiered associate-partner rates as a poor proxy for low value-high value services. Associates do the busy-work and the partners perform the complex tasks. It may very well be that the value/cost ratio for a new associate at $250/hour is low. Conversely, the value/cost ratio may be very high for an experienced attorney charging $500/hour in complex cases, simply because he cannot legally charge for value. The client often overpays for the associate and underpays for the partner under a model that makes nobody happy.

Reed has argued that straight hourly billing should be used as last resort, not as the default billing especially:

-When the client demands hourly billing and will not consider alternative billing methods.
-When there are variables that cannot be foreseen with reasonable accuracy.
-When no reasonably fair alternative method can be used.
-When the lawyer is willing to accept the representation but not willing to accept any risk.
-In situations requiring court approval of fees, where the court only recognizes hourly billing in approving fees.

I believe there is some hope on the horizon and the current economic downturn is helping to precipitate changes, especially variations to the straight hourly billing model:

More and more firms use a blended hourly billing model where one rate is applied whether an associate or attorney works on the case. This pattern works well when the work involves a pattern and it is known who will be doing the work. Patent, commercial contracts, financial closings, and tax work are increasingly billed that way.

Fixed plus hourly billing is also increasingly popular when most the legal services can be defined and a fixed fee quoted. The variable portion only is charged on an hourly basis.

Percentage fees, when reasonable, can also be used. Examples include a percentage of the amount of an estate being probated, or the amount of a real estate transaction, or the amount of a bond issue or an equity financing. Some of the most profitable law firms involved in M&A increasingly use that model and both clients and attorneys are typically happy with the arrangement.

Finally an arrangement I particularly like is the pure retainer or availability only retainer or “right to call retainer”. Under such a model I don’t even guarantee that any services will be performed for the retainer. Rather the retainer ensures that I will be available when requested and that I will not take on more than a agreed number of clients. My clients like it because they can reach me any time of day or night without worrying about being charged and the retainer is a fraction of the cost of a full time senior IP Counsel. I don’t have to worry about tracking hours or doing busy work. I can focus on maximizing value for my clients whether it takes me 5 minutes or 5 hours.

As more and more firms move away from hourly billing to hybrid, fixed fee, percentage or retainer models, the whole discussion of who charges for what becomes moot and invisible to the client. How associates are paid will change with salaries going up or down based on the type of work, experience, size of transaction and billing model…Some could end up making a lot more and others significantly less.

sakky · December 20, 2011, 11:22pm

Cellardwellard, allright, now we may have actually made some progress! It seems to me that you’ve made a convincing argument as to why the billing arrangements may be a product not of purely economically rational forces, but are rather a product of legal mandate, and are therefore represent a key market distortion.

But your logic stream lacks a crucial link that I highlighted before: what do billing rates have to do with how employees get paid? What you’ve discussed are legal restrictions upon how clients are billed. But as far as I know, legal restrictions determine how individual lawyers within a particular firm are supposed to be paid. Law firms are free to pay individual attorneys as much or as little as they please. No direct relationship necessarily exists between how a client is billed and how individual employees are then paid from those bills.

As a case in point, secretaries at a law firm aren’t invoiced to clients as itemized billable hours. But they are nevertheless surely performing some work to support client cases (even if that consists of just answering phonecalls and making photocopies). More importantly, they are still being paid. Surely they’re not working for free.

Again, what that demonstrates is that there is no clear and direct relationship between how a client is billed and how the law firm then pays its employees. If a law firm decides that it wants to divert a chunk of its fees to pay a multi-million dollar bonus to one of its secretaries (in the style of Erin Brockovich), I doubt that anybody can stop them.

So here’s what a savvy biglaw firm could do. They could simply announce that they’re only paying, say, $80k for brand-new associates. {Lest you think that pay level outrageous, remember that Federal clerkships pay even less, yet are still able to attract top candidates.} Granted, that will mean that many top graduates won’t join, although given the widespread unemployment within the attorneys ranks nowadays, I’m sure that some graduates from even top law schools will still take the offer. To backfill the remainder of associates, the firm then states that they will vastly increase the hiring of experienced associates - possibly by raiding from other law firms or prosecutors offices/DOJ, or aggressively hiring former state/Fed clerks. These experienced associates are (presumably) actually worth their high salaries, so it entirely rational to employ them. Leave the ‘training costs’ to other (stupid) biglaw firms who insist on paying them.

cellardweller · December 21, 2011, 11:52am

I think that would be very savvy, rather pretty stupid.

You need to remember that the $160K starting salaries for new associates applies to a very small number of firms.

That is not a relevant comparison. Under the same line of thinking why does Goldman pay $100K to students from HYPSM straight out of college with no experience while others happily go to work for TFA for $20K a year. After all the TFA hires include many of the very best and brightest graduates and they work nearly for free.

The attorneys seeking judicial clerkships are clearly not doing it for the money while the associates hired by biglaw are. They are different candidates altogether and not interchangeable. Some see clerkships as stepping stones to biglaw and are willing to take a temporary hit, but public law is a totally different animal.

There is an analogous situation for engineers. Some engineering graduates are hired by IB and consulting firms as opposed to tech firms or staying in academia. But the IB and consulting firms need to pay a lot more to get top candidates. Goggle does not pay especially well but they offer a very high level of job satisfaction. IB and consulting firms pay high salaries precisely because the workload is extremely heavy and job satisfaction is low. Nobody in his right mind would consider the job if he wasn’t paid accordingly. These firms pay the market price required to compete for the very best candidates INTERESTED IN THOSE JOBS. They pay the market price required to divert some top students from tech careers. Still, Apple, Microsoft and Google have no trouble finding top candidates for much less money because these candidates are passionate about technology and have zero interest in doing spreadsheets all day long and living out of hotel rooms. Arguably, the best engineers will not work for IB or consulting firms at ANY price. They would rather eat ramen noodles and work for a startup on their own project or settle for a moderate income and work for NASA.

Essentially, the market is efficient. Biglaw pays the salaries they do to junior associates because that is the market price for getting access to some of the best talent. Not surprisingly, the firms with the highest starting salaries and bonuses, such as Sullivan & Cromwell and Cravath are also among the most profitable. You are also talking about less than 100 law firms out of tens of thousands. Medium and smaller firms pay less and get the next tier of candidates, all the way down the line. Frankly, even at $160K, the hourly pay sucks. The typical biglaw ssociate puts in between 3,000 and 4,000 hours annually for an hourly salary averaging around $60/hour. That is hardly more than unemployed junior lawyers doing contract work!

rocketman08 · December 24, 2011, 10:56am

One of several big problems facing the legal profession at the moment, as highlighted by this thread, is that while lawyers view themselves as being ‘professionals’ most of their clients now view them as a ‘service provider.’

As with other service providers, businesses are now looking much more closely at costs vs tangible value. For the vast majority of legal work, if you can get the job down well and do it for less than the next guy you’ll get the gig. Top firms are having to compete on price in ways they never had to before.

All these arguments trying to say “if I can bill out an new associate for $X per hour for X hours per year then it’s profitable for the firm to pay a new associate X” are totally missing the point.

Yes that math works out, but it assumes a firm is able to keep an army of new associates fully charged out at those rates–and that’s not happening. Hence many of the changes taking place (smaller associate classes at top firms… permanent associate type positions with much smaller salaries…)

cellardweller · December 26, 2011, 7:15pm

There is not much evidence of that, especially at top firms. Most of them have recovered after a few difficult years and overall billings by the legal industry is back to where it was before the financial crisis. In 2011, a number of top firms have had some of their biggest profits in history and there has been pressure to increase associate bonuses at these firms not decrease them. There is also no evidence of reduction in new associate salaries.

kluge · December 30, 2011, 9:50pm

This thread has covered a lot of ground, but there are a couple of misperceptions I’d like to comment on. First, the “average” income of $640K/yr for all law firm partners is fictitious. The study doesn’t say that, and the study isn’t rigorous.

The mean income of the partners of the firms which responded to the survey was reportedly $640K. But (1) the respondents were skewed to big-cities (72% from 12 cities; 43% from just NY, Chicago and DC) (2) The 6.2% of lawyers who responded to the survey probably skews high, and (3) The reported average - i.e., the mean, is inflated by a handful of high-earners.

The median income for a partner in Seattle was $275K. That means that half of the partners at firms in that city - the few that made it through the winnowing out process and “made it” - took home less than $275K. Philly, Chicago and Atlanta, $375K - or about what an average radiologist makes. You can be assured that the smaller the city, the lower the median partner pay. As a general matter, lawyer’s incomes are typically wildly overestimated.

Next, regarding high pay for the tiny fraction of first year associates at BigLaw firms. Your analysis and analogies are all wrong. The correct analogy is to bonuses given to baseball players drafted out of high school and college. Not the pay of the guys in the majors - that’s a different issue - I’m talking about the money thrown at the kids before they get to spend years playing minor league ball in small towns, at the end of which some of them will make it to the big leagues, which has nothing to do with unions.

First round draft picks get a signing bonus of $1M to $8M. Hundreds of players are drafted each year and handed a six-figure signing bonus. [2011</a> Signing Bonuses Round 1-10](<a href=“http://www.angelfire.com/vt/prospectwatch/index201111.html]2011”>http://www.angelfire.com/vt/prospectwatch/index201111.html) Are they worth it that year? Hell, no. Not one of them. They’re all going to be playing ball that year in single-A at ballparks with $1 beer night and a mascot race as the big attraction. The parent club isn’t going to see a return on that signing bonus for years, if ever. (And the answer usually is “never.”) Only a select few will make it through the meatgrinder to play in the big leagues. To maximize the chances that they’ll get one of the “winners” major league teams pay them big money to sign (minor league salaries are modest, per the union agreement; the only variable is the signing bonus, which is unregulated.) The only leverage the players have is a willingness to hold out - to go play in another country, continue in school if they still have options (most “prospects” sign after their Junior year in college, because they lose leverage once they graduate.)

That’s your market comparison. That’s why BigLaw pays more to first years than they’re “worth” in terms of their product that year - they’re “prospects.” Their pay is a signing bonus based on the expectation that some of them will become stars, and the understanding that most won’t. It is rational. You just don’t understand it because you’re analyzing it from the wrong perspective.

LazyKid · December 31, 2011, 2:22am

^

One of the best posts I’ve seen in this forum. Very insightful…

The mean income of the partners of the firms which responded to the survey was reportedly $640K. But (1) the respondents were skewed to big-cities (72% from 12 cities; 43% from just NY, Chicago and DC) (2) The 6.2% of lawyers who responded to the survey probably skews high, and (3) The reported average - i.e., the mean, is inflated by a handful of high-earners.

The median income for a partner in Seattle was $275K. That means that half of the partners at firms in that city - the few that made it through the winnowing out process and “made it” - took home less than $275K. Philly, Chicago and Atlanta, $375K - or about what an average radiologist makes. You can be assured that the smaller the city, the lower the median partner pay. As a general matter, lawyer’s incomes are typically wildly overestimated.

Just curious, are all the law firms in this study NLJ250 -type of law firms? (doing litigation, corporate law, large attorney composition, respectable salaries, etc) Or, does this study include those bunches of no-name shops doing insurance defense, personal injury, or divorce settlement?

If we are strictly talking about NLJ250 law firms’ median partner incomes and the figures cited above are correct, law firm partners don’t make anything close to what I had envisioned before.

Also, I find it ironic that this thread is arguing how BigLaw associates are being paid more than they deserve, when in reality many BigLaw associates feel underpaid. After three years of law school + six figure loans, many BigLaw associates loathe at lack of job security at BigLaw, intense workload, insane cost of living in NYC (over half of all entry-level BigLaw gigs are based in NYC), and ridiculous taxes in NYC. Not to mention, the clients that these BigLaw associates work for on daily basis get paid double to triple the amount of these lawyers. (think guys in hedge funds, I-bankers at Bulge Bracket, people from PE shops such as KKR, Blackstone, or Silverlake, and the list goes on) This leads to the perception that, while these BigLaw corporate lawyers are working on deals with these bankers and hedge funders and working just as hard, they don’t get paid anything close to those ballers in high finance and thus may lead some BigLaw associates to feel actually underpaid for their labor.

In summary, the fact that BigLaw has notoriously high turn-over rate just proves that many aren’t happy with their input to output ratio (utility of their paycheck compared to their supply of labor at Biglaw) at BigLaw after a couple of years into the job.

Lastly, if one is to question why BigLaw associates are being paid 160k to start out, people should be asking why I-banks pay 120k to fresh college graduates without work experience or graduate degree. Some employers (think Citadel, Blackstone, PIMCO) pay over 200k to start out to fresh college graduates! My college buddy who works in trading at Bulge Bracket in NYC makes 140-150k a year straight out of college.

cellardweller · January 3, 2012, 12:05am

The study considered all attorneys from both large and small firms. If you were only to look at BigLaw the average partner income is much greater. The average partner profit at top 100 NYC firms is around $1.5 M. The most profitable law firm per partner in the world is Cravath with average profits per partner of around $4M.

kluge · January 4, 2012, 11:48pm

Actually, 55% of the respondents worked in firms with more than 500 attorneys. Less than 10% pf the responses came from firms with less than 50 lawyers. <a href=“http://www.mlaglobal.com/PartnerCompSurvey/2010/3.9%20Firm%20Size.pdf[/url]”>http://www.mlaglobal.com/PartnerCompSurvey/2010/3.9%20Firm%20Size.pdf</a> The “average” income listed in the survey is almost identical to the “average” profits per partner in the top AmLaw200 - about $650K per year. [The</a> Am Law 200 2011 - Profits Per Partner (Top 20) - The American Lawyer](<a href=“The Am Law 200 2011 - Profits Per Partner (Top 20) | The American Lawyer”>http://www.law.com/jsp/tal/PubArticleTAL.jsp?id=1202494429648) I’m not sure what your definition of “Big” law is, but I’d say the survey was skewed in the largish direction. And even those figures are suspect: [Law</a> Firms Profits Per Partner May Be Overstated 20%, WSJ Reports - Bloomberg](<a href=“Bloomberg - Are you a robot?”>Bloomberg - Are you a robot?)

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