Tag Archives: compensation

How Much Is A Law Firm Associate Worth? Here’s One Calculation.

If you like quick and dirty calculations, you’ll enjoy reading Samuel Blatchford’s back-of-the-envelope breakdown of the cost (and benefit) of associates to law firms (read his blog Ramblings on Appeal).

Billing a conservative 2,000 hours annually, associates bring as much as $640,000 in revenue for the firm per year, while costing a mere $340,000 in compensation, capital, and training, according to Blatchford.

Blatchford concludes in his Law Firm Economics that, “On this model, a partner in a leveraged firm (i.e., four associates per partner), could make $1.2 million in a year without billing an hour.”

Does this mark-up seem reasonable? Fair? Depending on your perspective, somebody might be getting the short end of the gavel.

Blatchford uses the Cravath Scale to first calculate average base salary and bonus for associates at first to sixth year levels.

Then, he makes a few necessary assumptions, like estimating the total expenses of an associate in real estate, technology, staff compensation, marketing, recruiting and training, charity, bar dues, retreats, and library expenses.

Finally, Blatchford uses the low-end of attorney’s fees ($400/hour) with an 80 percent realization rate for first-year associates.

So, by the end, we arrive at a surplus of $300,000 per year per associate for the firm.

If this is not the case for you firm, managers must be certainly wondering—where is all this surplus leaking to?

If your firm is not seeing enough value added by its attorneys, are your fixed costs or expenses too high? Are your billables too low?

It’s time for your firm’s own back-of-of-the-envelope calculations.

If your firm is not raking in the cash, maybe it’s because your clients are unaware of the true value of young associates.

In a recent survey for the WSJ by the Association of Corporate Counsel, a bar association for in-house lawyers, more than 20 percent of 366 in-house legal departments polled refused to pay for the work of first- or second-year attorneys, in at least some matters.

This survey demonstrates a rising trend where clients and the heads of law firms no longer want to pay high hourly fees to newly employed law school graduates.

It’s time both sides—clients and law firm managers—learn to invest in first and second year associates because they’re worth it.

If your clients are still concerned, consider posting more complete bios of your attorneys online. That way, their expertise and pedigree is clearly visible.

Also, before every new case, communicate to your clients exactly who will be working on the matter—and why. Even young associates have their advantage (knowledge of a new technology, new legal procedure, or even modern language).

Meanwhile, if your firm is, in fact, earning such a surplus, it’s possible you’re underpaying your associates. At least, that’s what Blatchford would have you believe. How about you?

-WB

Still having trouble assigning fair associate compensation?

Take C4CM’s course “Rethinking Associate Compensation: What’s Killing Lockstep?”

What do firms like Orrick, Flaster Greenberg, Fenwick & West, and Hastings know about making associates happy, committed and profitable? Turns out it’s quite a lot. In fact, these and many other firms responded to the recession by ditching traditional lockstep compensation in favor of a compensation system based in whole or part on associate performance.

So far it seems to be working. How are these firms using merit/performance based compensation to retain associates? Especially in a period when so many associates are being lost to in-house counsel positions with clients?

During this comprehensive audio conference, you will discover how many firms are making merit-based associate compensation work, along with the good, bad, and ugly lessons learned when making the transition.

Other practice management and associate compensation training materials available here.

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How To React To An Employee Who Negotiates His Salary

When it comes to negotiating salary, we’ve already discussed a few tips for success.

But, what happens when you’re the law firm manager who is negotiating with your own associates?

How do you appropriately react to associates who are seeking alternative employment?

In the throws of negotiation, it’s important to appear objective, firm, and fair—even if these emotions do not reflect reality. Negotiation is not a battle. Succesful leaders support each member of their team, sincerely wishing them well, regardless of the circumstances surrounding their career or pending departure.

Pocket Your Emotions

Whether during performance reviews or mid-year bonus talks, if your associates reveal the fact that they are considering a career change, stay calm and supportive.

It may be that replacing this employee will not only be difficult, it would be impossible! Or, perhaps your firm put in many training hours and dollars into this particular person. Your initial reaction may be fear, defense, or even anger.

Try to remember, though, that employees are prone to keeping their options open.

And, the best way for a valued employee to negotiate a higher salary is to get offers from outside firms. Allow your associates to maintain this competitive edge—after all, isn’t resourcefulness a part of what makes exceptional law firm professionals?

Ask Them What They Want

So, now that you know an employee is considering his or her options, why do you think that is?

Ask your employee to explain their decisionmaking process. Are they looking for a bump in compensation? Is it the commute, or time demands? Are they stimulated enough in the workplace?

Whatever the reason, it’s not only important for retaining this valued employee, but it will also likely give you insight to the desires of other employees at your firm.

If one person is unhappy with your family benefits package, he or she is probably not alone in this sentiment. Or, if one person feels overworked and underappreciated, it may be time to shedule a team-building retreat or mandatory vacation days for all.

The best opportunity for honest feedback that will open doors at your firm is while one person is shutting them.

If no amount of money or promotion will convince this specific individual to stay, you can at least avoid a mass exodus by improving workplace policy and routine for those associates who remain based on frank review and conversation with your departing soldier.

Ask Yourself What You Want

Finally, ask yourself, what is best for you and your firm?

If this employee is irreplaceable, consider ceding to his demands. Only accept terms that will leave both parties grateful, as opposed to resentful.

However, ask yourself if agreeing to an employee’s negotiated demands won’t just patch a bigger problem. Retaining an associate who holds that much negotiating power may mean your firm hasn’t diversified its staff adequately.

It’s unlikely that just one person is right for any job.

And, with the law industry super-saturated with job seekers, you should calculate the true costs of losing an experienced associate and replacing them with a cheaper, more trainable one.

At the same time, employees expect to advance in the workplace. The excuse of a “recession-based budget” will only fly so long at your firm. Eventually, you’ll have to replace either the excuses or your departing associates.

Whatever decisions your employee and your firm makes in the end, understand that the process isn’t personal. In business, unlike battle, negotiating to a win-win compromise is always best—and lasting—for both sides.

-WB

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From Out Of A Job To In-House: How Corporate Counsel Trends Are Challenging Big Law Practice

Once again, recent reports on industry trends translates into good and bad news for lawyers.

According to the Association of Corporate Counsel 2011 Census Report–as described in this press release–the past five years have increase in-house legal spending and decreased external spending on litigation.

Translation? A power shift from large law firms to in-house counsel departments is on the rise.

And the current economic recession has caused, or at least exacerbated this trend.

“From demands for discounts, using online auctions to select firms, hiring law grads straight out of school, or simply moving more legal work in house, general counsel are pushing back on their outside lawyers,” reports the WSJ Law Blog.

However, the recession hasn’t depressed in-house counsel salaries.

In fact, notwithstanding hard economic times, compensation by in-house counsel has increased.

Of those surveyed, 22 percent of in-house counsel are earning more than $300,000 per year in salary, bonus, and other compensation, which is a rise of 16 percent from 2006, and 57 percent from 2004 (via WSJ Law Blog).

In-house counsel are seeing increased business and higher salaries, so much so that 37% plan to hire more help. According to the same report, 37% of in-house counsel allegedly planned to hire more staff in 2011. Good news for out-of-work assistants, paralegals, and even some staff associates.

Unfortunately, however, law firms will be forced to adjust to this decline in demand for outside counsel services.

The census discovered the use of outside counsel for tax issues has decreased (20% use them, vs. 30% in 2006). The same holds true for mergers and acquisitions (28%, vs. 35% in 2006) and, most surprisingly, for litigation.

So, if you’re planning a career shift (or have already taken advantage of the recent trend) toward in-house, below you’ll find a few tips for success.

If you’ve changed from a large law firm to corporate counsel, ViXS Systems Inc. general counsel Cheryl Foy emphasizes the importance of learning about the culture of the company you’re working for, including a comprehensive understanding of the needs and challenges of its business.

“Figure out who you’re working with. It’s folly to go in with the idea that ‘I’m the lawyer’—people will argue with your legal opinion. You have to build credibility so assess the culture first,” says Foy (via Canadian Lawyer Magazine).

In addition, don’t let a power shift in industry dynamics translate to a shift in power at your new position.

When Foy found herself in a situation in a previous in-house job where she wanted to be part of the executive team but wasn’t regarded as such, she received this advice: “You need to be acting like you’re at the table already,” (via Canadian Lawyer Magazine).

Make it clear on hire that a position as in-house counsel is one of management and decision-making. Act like a leader from the outset and you’ll be considered one in-house.

Finally, to fully understand the ins and outs of in-house counsel, remember there’s a big difference between big law practice and a position as in-house corporate counsel.

“Adapt a communication style that reflects that your audience has changed,” advises David Allgood, executive vice president and general counsel with the Royal Bank of Canada (via Canadian Lawyer Magazine).

“Remember it’s the enterprise who is your client now.”

And, with a new 40-60 hour workweek (instead of 60-80), who can complain about that?

-WB

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Need to Know How Law Firms Are Holding Up Across The Globe?

If an administrator, lawyer or client wishes to examine the top-tier firms in say, Germany, where she or he will be travelling for business, there’s a good chance she or he will eventually check out the 20-year old Legal 500, in either print or online form.  This compilation in capsule formula—the UK’s invention—is good for a quick perusal of firms’ capabilities world-wide and is pretty exhaustive. It seems to keep readers up-to-the-minute on the local happenings in each region.

One imagines that this sort of data can come in handy when, for example, one is headed for a never-before-been-to part of the world. Or, if your firm is planning on setting up shop a far distance from home turf, you’ll want to examine the new territory by putting out feelers as to where firms have been successful in this new venue, and where they haven’t.

So what does this birds-eye-view series—the company also puts out e-books per region and industry (downloadable on Kindle, iPhone, iPad etc.)–have to say about each country, per practice area?

Let’s look at a few representative examples.  If we  examine the reportable launches and leavings of firms in, say, Thailand, we learn that politics have affected investments and tourism but that the economy is robust, due to the Thai bank’s closed door policy to derivatives and the like.  Baker & McKenzie is the largest firm of note.

On to Scotland, which seems to have four big firms dominating. These are listed as  Dundas & Wilson LLP, Maclay Murray & Spens LLP, McGrigors LLP and Shepherd and Wedderburn. We read, too, that Edinburgh’s reliance on financial services has made it susceptible to the downturn.

As to Scottish trends; there is a sense of Londoncentricity in the air, and there are lateral hires aplenty.

In China, although M&A activity increased, private equity funds didn’t do well.  Many practices underwent serious downsizing.  However, it’s expected that, as soon as US and European markets recover, there will be a lot of incoming activity in the months to come.

And guess which firms reported upstepped momentum? Those firms housing “strong” litigation and employment practices.   Additionally, there is what has come to be termed a great deal of “internationalization” (or, as the British say, “internationalisation”) of local firms.  In that arena, rainmaker Rupert Li left Clifford Chance LLP for King & Wood.

In Germany, antitrust experts are being wooed in the aftermath of the global recession.  In particular, they are being sought for advice in the areas of summary proceedings and compensation claims.  There is also a great deal of that oft-used phrase, now, “cautious optimism” about the possibilities around the corner.  Another word that is tossed about much is “transparency”.

There was a notable lack of activity in areas such as private equity; this affected many German firms’ bottom line.   Also, Germany is learning from the West: “Firms have increasingly looked towards Chapter 11 bankruptcy proceedings in the US to learn what may be adapted…for German or European insolvency legislation,” we read.  “As a result, the criteria by which German judges choose insolvency administrators for particular cases is increasingly becoming a subject of discussion.”

It’s not inconceivable to think that, if your firm is not already so structured, in the years to come you’ll be doing business in quite a few of the 90 countries represented here. No one lives or works in a bubble anymore.  In fact, we’re all closer to other parts of the world than we think and a site like Legal500 seems to lessen the distance ever so slightly with these snapshot views.

To read more, go here:  http://www.legal500.com/

-ERM

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Compensation Cost Trends Mid-Recession – What Worked

In 2009, when James D. Cotterman wrote his piece for the ABA’s Law Practice entitled: “Managing Change: How Law Firms Are Answering The Wake-Up Call”, he was beginning to see across-the-board pay cuts—from 10 to 20 percent of a cut in base salary.   Cotterman championed the idea of “the balance of the profession” doing likewise. Additionally, this legal management consultant  had a few other ideas for helping law firms out when they were “in triage mode”.

The way things stood in the midst of the recession, traditional law firms had what Cotterman called an economic law model.  This cost structure model was divided up into segments, expense-wise.  The cuts of the pie went something like this:  78 percent labor, 8 percent facility and technology and the remaining 14 percent “other”.

Breaking these segments down, Cotterman deduced that the 14 percent facility and technology were tied up in contracts and long-term leases, and as thus, couldn’t be tinkered with.  Next came the “other”, and since a good portion of this included operating costs, he determined that this amount wasn’t going away.

That left labor and its associated costs. So what did many firms elect to do in cases where immediate relief was called for?  There were two options, per Cotterman:  the drastic staff-reduction which would immediately soften the blow, or the preferred and more manageable method, one which would open up a whole new level of opportunities.

The more manageable way involved “altering” lawyer compensation. But how to go about it?  “It’s a critical question, given that law firms are such labor-intensive businesses. That is where the money goes, and that is where the savings options are,” Cotterman noted.

There were many factors at play here, and they had to be looked at carefully. One very real risk—talent bailout—had to be weighed, he stressed.  If key talent sensed that they were about to be inadequately compensated, they would “take their clients and leave”.   There were still many financially stable firms that would welcome such partners.  (As we now know, these bailouts were precisely what caused a few rocky boat scenarios in large firms.)

Cotterman couldn’t stress this concern enough.  “Sadly,” he cautioned, “the drain on talent usually starts at the top of the chain and works its way down. If management allows a drain like that to continue for even a short while, the lawyers remaining in the firm may not constitute a sustainable enterprise.”

He reminded readers that the downturn had “eviscerated entire practices” and stressed that firms were rethinking economic contribution expectations. “[F]irms are considering more individualized compensation adjustments if a first round of across-the-board reductions is insufficient.”

Too, greater weight was given to recent performance when it came to devising a compensation package.   (Previously, past performance averages and trends were considered equally with the current year’s performance.)

Finally, a more consistent set of decisions involving compensations had to be arrived at and stuck by.  Firm leaders had to formulate a plan that would send a viable message to everyone inside the firm as well as to future candidates for recruitment.  This was not easy.  “The challenge of getting this right in the midst of so much turmoil is daunting,” he explained.

Cotterman didn’t believe in overhauling the lockstep compensation system.  In fact, he believed that lockstep was a good thing; that there are reasons it’s lasted so long.  First, it’s easy to administer. For single-tier firms, turnover is a necessary thing.  Secondly, “for all its shortcomings”, it remains remarkably merit-based.


Cotterman explained how the variation in compensation can be evaluated by an R-squared formula that arrives at performance measured by value of the associate’s recorded time. He explains it this way: “Based on our large databases of associate time and productivity, the strength of the relationship (R-squared) between the value of associates’ time and compensation is remarkable at 0.92 where 1.0 is the maximum value. Essentially only 8 percent of the variability in associate compensation is explained by all factors other than productivity.”   You couldn’t get more merit-based than that!  For more, go to http://www.americanbar.org/publications/law_practice_home/law_practice_archive/lpm

-ERM

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