Structuring Compensation for a Competitive Market

10/01/2011
Published 10/2011

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During the past four years there has been more change and controversy regarding lawyer compensation than in the several decades before. Consider these key signposts on what has been a very bumpy and uncertain road:

  • As the economy began its slide into recession, starting associate salaries of $160,000 and partners with $1,000 an hour billing rates were the talk of the law profession.

  • Within two years, starting associate salaries at the largest firms were cut by 25 to 50 percent, and those associates still being hired were assigned to pro bono or internal internships.

  • At the same time, senior partners viewed as not pulling their weight (that is, not bringing in enough billings to justify their high compensation) were de-equitized out of their firms.

  • Offshoring of routine legal work to India and other countries, with a resulting cost savings of up to 80 percent over domestic lawyer rates, quickly became accepted...

  • ...only to be followed today by “onshoring” of the same work back to the U.S., to contract lawyers paid $50,000 and located in low-cost states like West Virginia and North Dakota.

  • New virtual organizations like Axiom pay discounted rates to a freelance group of lawyers who used to work at major firms, but now work at home or at client locations.

Such developments reinforce the fact that law firms no longer can or will pay compensation out of scale with what clients will accept. There is a direct interrelationship between law firm billings, profits, and partner compensation. That interrelationship is expressed in various ratios and weightings, with wild cards like origination credits tossed in for good measure. But the essential fact is that the value clients want increasingly determines what lawyers will be paid. As embodied especially in the Association of Corporate Counsel (ACC) Value Challenge, that means more efficiency in fees, and less emphasis on increased profits per partner. The objective is lower costs, and law firms will increasingly feel the brunt of that effort.

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