Tag Archives: Economics

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?


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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What Happens When Lawyers Love Their Jobs?

Recent studies have focused on “employee satisfaction” and its links with productivity to enhance profits in the workplace. When employees are satisfied at work, they are less likely to leave their jobs, theorists claim.

Increasing employee retention is a valid strategy for law firms hoping to reduce costs.

Hiring and training—in technical fields like law—are especially draining on bank accounts and human resources. In addition, new employees involve a lot of up-front costs, including hours of training instead of billables, business cards, welcome lunches, and slow learning curves that pay off only the long-term.

These costs are lost when an employee leaves. For firms, this conclusion doesn’t mean holding off on training new associates. But it does mean offering a job that makes employees happy to stay.

Figuring out the incentives that will make employees happy is, surprisingly, more difficult than researchers first thought. After all, economists have spent centuries working out complex game theory and identifying incentive systems that motivate mankind.

It doesn’t seem like a stretch to apply such theories to management.

Unfortunately for employers, however, an individual’s happiness is subjective and ever changing. In fact, sense the inception of Google, online searches for the term “happiness” have tripled—leaving analysts to believe men and women are still confused about which products they love, which lives to lead, and what professions will make them happiest.

The search for meaning in life increases in times of austerity, like an economic recession.

So, other than scouring the many search terms in Google, how can law firms know what will incentivize their staff?

First, conduct your own study.

Although academic research is useful for practitioners, the best way to understand your work force is to ask them. In fact, consider hiring a PhD student intern (or graduate) for an inter-office experiment.

Circulate surveys, conduct interviews, and analyze data of your own employees. Ask them about their best days at work, their worst days, and why for days they keep coming back.

Of course, higher salaries and monetary incentives will always be important (cash is king). But, depending on your corporate culture, company size, average age, or structure, for example, you may be surprised at how small, intrinsically-valued items serve as motivators.

For example, personalized letters of appreciation often go farther than gift certificates in motivating employees. Sure, if asked, employees might suggest monetary bonuses as incentive ideas. But, in practice, you may find that it’s the letters or kind words fom bosses that actually lead to increased productivity.

With this in mind, second, consider creative incentive systems.

A recent experiment offered participants two rewards for a task measuring productivity: a water bottle gift item or seven dollars cash. When asked to choose, 80 percent of participants chose the cash. However, when different groups weren’t given the choice, the results in productivity were surprising.

“The cash bonus didn’t have any effect on the speed or accuracy with which the students did their jobs,” reports the Harvard Business Review blog.

“However, those receiving the free bottle reciprocated by upping their data entry rate by 25%, a productivity increase that more than offset the cost of the bottle itself.”

So, although your firm should conduct in-house research and surveys about what employees find most satisfying, it’s important that first-person experience also drive your study. Don’t let employee contribution or opinions on “happiness” be the sole input for your productivity policy.

Discover what kinds of creative incentives you can offer associates. Maybe monogrammed water bottles are not the key to your firm’s efficiency. But, monogramed coffee mugs or cufflinks (at a reasonable price) may yield higher productivity returns than cash bonuses.

Finally, forget employee satisfaction and focus on employee engagement.

“Employee engagement is the emotional commitment the employee has to the organization and its goals,” writes Kevin Kruse, entrepreneur and NY Times bestselling author and his latest book is Employee Engagement 2.0, for Forbes.

There are many factors that increase employee satisfaction and happiness. This could be free meals, higher salary, or larger offices. However, not all of these factors play into increased productivity and profits for your firm.

Increasing employee engagement, however, leads to an increased commitment of employees to your firm, its clients, and its success. The direct effect of employee engagement is higher goal-seeking behavior and the organizational cooperation that yields financial returns for your firm.

So, when an employee asks for free Colombian-brewed coffee at your firm, think about the beneficial effects caffeine will have on employee concentration and attention span.

When employees have access to unlimited high-quality beans in the office, they’re less likely to take long coffee breaks at the neighborhood Starbucks. All-in-all, these create positive returns for your firm.

However, simply gifting your employees Starbucks cards will only increase temporary satisfaction for your employees. It will likely not yield any permanent results. It may even increase the expectation for more gift cards in the future—so that if employees stop receiving them, their productivity and morale will decline. It’s not enough that lawyers love their jobs. They must also love their firm, its partners, and its objectives.

Of course, all of these variables depend on the particular characteristics of your firm and its employees. That’s why the more you know, the better prepared you are to engage your associates productivity.

Former Campbell’s Soup CEO, Doug Conant, once said, “To win in the marketplace you must first win in the workplace,” Kruse reminds us in Forbes.

And to win the workplace, your firm must conduct its due diligence.


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Winning The Partnership Track Lottery & Leadership Tips For Young Lawyers

It’s The Economy: Why Are Harvard Graduates in the Mailroom? The New York Times Magazine

According to his article in The New York Times Magazine, Adam Davidson implies that today’s most educated and talented young people have entered into a sort of employment lottery.

Like the irrational behavior of drug dealers in Stephen J. Dubner and Steven D. Levitt’s book Freakonomics, today’s best professional candidates are working overtime and underpaid with the naïve hope and off chance that, one day, they’ll hit it big.

“Young, ambitious accountants who toil away at a Big Four firm may have modest expectations of glory, but they’ll be millionaires if they make partner,” writes Davidson.

“The same goes at law firms, ad agencies and consulting firms. Startups explicitly use a lottery system, known as stock options, to entice young people to work for nothing.”

Law firms—especially BigLaw—are now experts at playing this employment lottery game. They ask young associates to keep their billable hours up, they’ve lengthened the partnership track, and they’ve incentivized late nights and low personal wellbeing.

These same firms understand that young first-years (and on) will work hard and long at the prospect of winning the precarious employment lottery. Each associate clings to the hope that he will be the one to finally make equity partner.

The older generation of lawyers is unsympathetic to this partnership roulette and its higher standards for career advancement.

“Rationalizing these actions, many big-law leaders have convinced themselves that the current generation of young lawyers is inferior to their own,” explains Steven Harper in his article for the AmLaw Daily.

“They complain about those who act as if they’re entitled to everything and unwilling to work hard, as they once did.”

It’s why young, newly announced partners have even more to live up to in the eyes of their firm.

For those lucky few who finally make it to partner—those who hit it big in the employment lottery—all associate eyes are on them. The expectations to become an effective, productive case leader and lawyer are high.

And, to make matters worse, these new leaders who are perceived by their peers as having low status, in terms of age, education, experience, or other factors, must obey different rules than their partner predecessors.

Traditionally, subordinates respond best to participative leaders (after all, nobody likes an overbearing micro-manager). However, according to the Harvard Business Review (HBR), recent studies prove this to be true only for high-status leaders—those men or women who are perceived to have superior education, experience, or age, for example.

By contrast, new studies show that leaders with a lower status rating—meaning, young law firm partners—are more highly regarded and receive better results by subordinates when they are decisive, demanding, and—to be frank—bossy.

Two different studies show that the low status leaders receive highest marks, in terms of confidence and effectiveness, when they are directive and ignore team participation. Basically, young leaders should act bossier to subordinates than older ones.

“If these results seem counterintuitive, imagine this: You’re on an experienced team that gets an unfamiliar leader. You look for clues about his status—How old is he? How does he dress? Where did he train?—and form an assessment accordingly. If he seems to be a lightweight, you’ll probably resist his attempts to influence you. And if he asks for your input, chances are even greater that you’ll view him as lacking in competence,” writes Stephen J. Sauer in his article “Why Bossy Is Better For Rookie Managers,” in the HBR.

“But if he’s directive and assertive, you’ll take that as confidence, and you’ll come to see him as more able than you first thought. His perceived capabilities will rise.”

Young lawyers who are lucky enough to hit the employment lottery may face unexpected challenges from their dubious team of associates.

And, as a young partner, if you get the impression others see your leadership as inferior—especially by the older generation and lottery losers—you’re probably right: They do.

It’s time to assert yourself into the hierarchy—until, of course, you’ve proven that it was more than just luck and freakonomics that got you to the top.


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Highly-Regulated U.S. Law Industry Reminds U.K. Firms To Keep Out: New York State Bar Rules On Ethics

Formal publications and informal publications, like this law blog, spend a predominant amount of time advocating for legal service innovation.

Clifford Winston, Robert W. Crandall, and Vikram Maheshri of the Brookings Institute suggest in their publication, First Thing We Do, Let’s Deregulate All the Lawyers. The authors claim entry barriers and restrictions combined with government-induced demand for lawyers drives up the prices for legal services, which then draws significant social costs, hampers innovation, misallocates the nation’s labor resources, and creates socially perverse incentives.

Winston and Crandall also contributed an op-ed to the Wall Street Journal calling for the immediate deregulation of the legal industry. They wrote:

“The reality is that many more people could offer various forms of legal services today at far lower prices if the American Bar Association (ABA) did not artificially restrict the number of lawyers through its accreditation of law schools—most states require individuals to graduate from such a school to take their bar exam—and by inducing states to bar legal services by non-lawyer-owned entities. It would be better to deregulate the provision of legal services. This would lower prices for clients and lead to more jobs.”

Amid countless lawsuits accusing law schools of misrepresenting employment statistics and a boom in online legal services, law school graduates are desperately seeking jobs, and clients seeking affordable counsel.

Both the Cato Institute and OpenMarket.org agree with the WSJ that deregulation is necessary.

“People can represent themselves in small-claims courts, which have simplified procedures, but in many states, such courts can hear only the tiniest legal claims, like those seeking less than $5,000,” states OpenMarket.org (via ATL).

“Every other U.S. industry that has been deregulated, from trucking to telephones, has lowered prices for consumers without sacrificing quality,” continue Winston and Crandall.

Foreign countries have also deregulated the law industry. Consider, for example, the U.K.

Law firms there can receive external investment—even through an IPO—and non-law firms can offer legal services without special legal accreditation.

The Legal Services Act, which passed in October, provides for new ownership structures in the U.S., but to date, no major U.K. law firm has taken advantage of it (via WSJ).

And, according to the Wall Street Journal and a recent ethics opinion by the New York State Bar, perhaps U.K. firms should continue to stay off U.S.-regulated soil. Here’s why.

The New York State Bar, which is the largest in the country with 77,000 members, recently ruled that New York lawyers can’t practice law in the state if they are part of U.K. law firm with non-lawyer owners.

“The committee considered this scenario: Lawyers licensed to practice in New York enter a business relationship with a U.K. firm that has non-lawyer owners and managers. The New York lawyers establish a New York office for the firm and represent New York clients. They don’t share confidential information with the non-lawyers and they abide by U.K. rules,” writes the WSJ Law Blog.

The New York State Bar ruled that the above scenario violates ethics rule that forbids a lawyer from practicing law for profit with an entity that includes a non-lawyer owner.

Although The American Bar Association is considering a tweak to its ethics rules, there is no end in sight. Despite the dire economic climate for lawyers, the U.S. is hesitant to propose any innovation that would deregulate the law industry.

FT has more on the ethics opinion here.

What’s the solution? To garner more business overseas and to exit this financial crisis, will U.S. states be forced to deregulate their law industry?

In today’s globalized world, a combination U.S.-U.K. law firm shows signs of potential success. But, for the moment, it looks like U.S. law firms will have to go it alone.


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Legal Services Outsourcing & Indian Openness

Corporate America has been outsourcing work to India for decades. The legal industry quickly followed suit.

Not only does sending work abroad cut down on labor costs, but it also keeps business open 24 hours.

By the end of 2009, the number of legal outsourcing companies in India exploded from 40 (in 2005) to 140, according to Valuenotes (via NYT), a consulting firm in Pune, India. By 2014, India’s legal outsourcing firms are expected to surpass $1 billion, which is an increase of 38 percent from 2008, Valuenotes estimates (via NYT).

Still, U.S. and U.K. firms outsourcing to India have faced serious barriers in the past. The biggest hitch to outsourcing legal services? Indian law restricts foreign firms from opening offices or practicing law in the country (via WSJ Law Blog).

However, the Wall Street Journal Law Blog reports that these roadblocks are gradually crumbling. India’s Law Minister Salman Khurshid and the U.K.’s Secretary of State for Justice Kenneth Clarke have recently agreed to work on an arrangement in which India would premit U.K. law firms to enter the Indian legal market, the Hindustan Times reports (via WSJ Law Blog).

In turn, the British would agree to accomodate more Indian firms in the U.K., according to the same article. While the U.S. has not yet entered the discussion, open dialogue is definitely a change toward the better in terms of international legal cooperation.

“We understand the U.K. firms want to open offices in India for non-litigation purposes—mainly drafting of business contracts, deeds, agreements and other similar works,” said Ashok Parija to the WSJ Law Blog, the chairman of the Indian body that regulates the legal profession. “We will negotiate with our UK counterparts to work out a principle of reciprocity, which will benefit both sides.”

In hard economic times, the ability to generate doc review overseas, for example, or the drafting of simple legal documents will be key to many struggling firms.

Companies are already making use of innovative tools to lower legal fees, such as “reverse auctions“, to outsource high-volume and routine work, such as tax filings and intellectual-property transactions, to the lowest bidder.

Given the freedom to outsource more business to India, law firms should be able to lower their expenses and, in turn, attract an increased number of these cost-cutting clients.

“We will continue to go to big firms for the lawyers they have who are experts in subject matter, world-class thought leaders and the best litigators and regulatory lawyers around the world—and we will pay a lot of money for those lawyers,” Janine Dascenzo, associate general counsel at General Electric, said about outsourcing legal services abroad (NYT).

At the same time, Dascenzo agrees, “You don’t need a $500-an-hour associate to do things like document review and basic due diligence.”

Unsurprisingly, in the field of law, there’s no comparison to a recession when it comes to opening borders, lowering barriers, and practicing complete free market economics.


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What’s In A Number? The U.S. Census Poverty Report & How Game Theory Is Replacing Lawyers

Economists use complex computer models to predict upswings and downturns in the global economy, and as a basis for problem-solving when it comes to crises and joblessness.

Via similar predictive technology, on Tuesday, the government released data that confirmed how dire the economic situation continues to be.

According to a poverty report by the U.S. Census Bureau, last year’s poverty rate of 15.1 percent was the highest level reached in America in 17 years.  Approximately 46 million people were classified as poor in 2010, with the median annual income dropping by more than two percent to $49,445.

The key factor attributed to the economic decline was a continued lack of jobs (we’re not surprised, either). You’d think the nation’s best minds and technology could uncover numbers and trends that are a little less obvious.

And they can.

Less noticeable, behind the scenes, some sectors are, in fact, experiencing some growth. In comes, the technology sector.

The problem is, innovation in technology may actually help to continue joblessness in America. Here’s why.

Take, for instance, an invention by Bruce Bueno de Mesquita. He created a computer software that simulates what economists call “Game Theory.” Game theory predicts how events will unfold by using the presumption that individuals or companies act in their perceived best interest.

Bueno de Mesquita runs a consulting agency that uses this system of game theory-based numerical modeling, and he’s quite successful at it.

“Most decision-making advice is political, in the broadest sense of the word—how best to outfox a trial prosecutor, sway a jury, win support from shareholders or woo alienated voters by shuffling a political coalition and making legislative concessions,” The Economist reports on Bueno de Mesquita’s practice.

Although a consulting agency would need to provide costly training and expertise to operate these computer programs, the software can solve problems at far higher speeds and efficiency than the average human being.

In the field of law, you can only begin to imagine the immediate and concrete applications of this.

“’[Mediation and negotiation] software is now emerging.’ Barry O’Neill, a game theorist at the University of California, Los Angeles, describes how it can facilitate divorce settlements,” writes The Economist.

“’A husband and wife are each given a number of points which they secretly allocate to household assets they desire. The wife may inform the software that her valuation of the family car is, say, 15 points. If the husband puts the car’s value at 10 points, he cannot later claim that he deserves more compensation for not getting the car than she would be entitled to.’”

What’s clear is that the economy is in poor sorts, and economists are working toward solutions to end poverty via better technology, innovation, and efficiency.

What’s not so predictable, however, is the discovery that improving technology and its resourcefulness—particularly for legal services—may work to reduce the number of lawyers and professionals, not increase it.

So, are avatar lawyers really too space age for today, or are they rapidly becoming a reality?


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Deregulating The Law Industry: Pros, Cons & Free Market Economics

Law blogs, like this one, spend a large amount of time pushing for legal service innovation

Creativity, FLEX time, investment capital, reverse auctions, social media–these are all ways by which law firms are told to innovate to provide more efficient services to their clients and to increase profitability among their partners.

But instead of forcing innovation on existing law firms, perhaps innovation should be brought upon the industry via increased competition.

It’s not the first time that the practice of law has been called a monopoly. Clifford Winston, Robert W. Crandall, and Vikram Maheshri of the Brookings Institute argue in their publication, First Thing We Do, Let’s Deregulate All the Lawyers, that entry barriers and restrictions combined with government-induced demand for lawyers drives up the prices for legal services. 

The authors further purport that this economic inefficiency draws significant social costs, hampers innovation, misallocates the nation’s labor resources, and creates socially perverse incentives.

This week, Winston and Crandall contributed an op-ed to the Wall Street Journal calling for the immediate deregulation of the legal industry. They write:

“The reality is that many more people could offer various forms of legal services today at far lower prices if the American Bar Association (ABA) did not artificially restrict the number of lawyers through its accreditation of law schools—most states require individuals to graduate from such a school to take their bar exam—and by inducing states to bar legal services by non-lawyer-owned entities. It would be better to deregulate the provision of legal services. This would lower prices for clients and lead to more jobs.”

Amid countless lawsuits accusing law schools of misrepresenting employment statistics and a boom in online legal services, it’s clear that law school graduates are seeking jobs, and clients are seeking affordable counsel.

To achieve this, both the Cato Institute and OpenMarket.org agree with the WSJ that deregulation is necessary. “People can represent themselves in small-claims courts, which have simplified procedures, but in many states, such courts can hear only the tiniest legal claims, like those seeking less than $5,000,” states OpenMarket.org (via ATL).

“Every other U.S. industry that has been deregulated, from trucking to telephones, has lowered prices for consumers without sacrificing quality,” continue Winston and Crandall.

So, to spur innovation and increase economic efficiency, the legal industry should be deregulated. Or, should it?

There are myriad economic reasons in favor of deregulation, but an equal number that support its continued regulation.

Common law procedures and the protection of Constitutional rights lay at the foundation of American society. At the same time, understanding American civil liberties is complicated, convoluted even.

The 1966 Miranda v. Arizona Supreme Court decision was critical for U.S. laymen. Miranda warnings ensure that individuals are given equal and fair standing under the law, at least as defendants in criminal matters. One particular Miranda warning is the right to an attorney, and the right to have an attorney appointed for you in the event you cannot afford one. It could be inferred, along with this court decision came the economic opinion that legal services are a public good–defined by its nonexcludability and nonrivalrous consumption–not party to typical free competition rules.

Adam Smith is famous for making the observation that certain goods in society would have to be funded by means of general contribution. One of the key characteristics of a public good is its unique regulation via state and non-state actors (institutions not unlike the American Bar Association).

Some might argue that regulating the legal industry is necessary to keep legal services of an equally high-quality and ethical standard, accessible to all. By limiting entrants, regulation is, in fact, preserving the spirit of this public good.

So, which economic theory do you believe? Is law just another business in an free market, or is it a public good to be regulated? Is the legal industry headed toward deregulation or just a revision of old traditions?


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Why Law Firms Should (But Don’t) Make More Women Partners

It’s time to choose a sponsor! Put away your Alcoholics Anonymous membership and pull out your bar card. There’s now an economic reason to advocate for more women in law. Law firms, especially partnerships within them, are notoriously shy of female representation. But potential future revenue depends on making Jane, not John, a partner at your firm.

The ratio of women equity partners to women non-equity partners from 2002 to 2007 was 2.546, roughly half the ratio of 4.759 for their men counterparts, according to a recent Temple University Legal Studies Research Paper. Female partners are also paid less than male partners despite being equally productive in generating revenue per lawyer for their firms, according to the same data. There is also no indication that there are fewer women practicing law; in fact, women represented approximately 50 percent of associate hires in the eighteen years prior to 2001. For the same years, however, women accounted for only 15 to 16 percent of partners. So what are women doing differently to prevent them from earning that corner office? Some are now calling it the “The Sponsor Effect”.

Just like the phenomenon El Niño, success in the workplace is a paired effort (see, La Niña). In this case, the success of younger female lawyers depends on sponsorship by a more senior male or female lawyer. A study conducted by the Center for Work-Life Policy in collaboration with American Express and published by the Harvard Business Review found women underestimate the importance of sponsorship and networking among senior level managers. Furthermore, those who do appreciate its importance don’t take the time to properly develop these relationships. Sylvia Ann Hewlett, founder and President of the Center, explains, “a sponsor is someone who advocates for my next promotion and speaks of your strengths and makes the case for your advancement in your absence.” Supplementing this definition, Kerrie Peraino, Vice President for Human Resources with American Express, says “a sponsor takes calculated risks for you.”

These calculated risks are especially important in our current economic environment, where billable hours are at an all time low and fear for your job at an all time high. Instead of increasing billable rates, reducing vacation time, or cutting costs (such as HR initiatives targeted at morale and employee incentives), senior managers should take the time to sponsor younger female associates. In fact, the average gross revenue of firms with the highest percentages of female lawyers was approximately $20 million higher than firms with the lowest percentage of female lawyers. More female employees leads to higher revenues because for less compensation, women are willing to perform at the same level as their male equivalent. The biggest mistake made by partners within firms of any size would be de-prioritizing professional development and career advancements of their subordinate associates, especially during a recession.

Recession leads to higher competition, and sometimes harsh realities. So firms—promote more women to senior positions since female lawyers are equally productive, but cost you less (sorry, ladies, it’s true). Female attorneys—find a sponsor, network to the top of the power chain, research the opposition, and then don’t let your firm negotiate you down from anything but equal opportunity and pay. On the macroeconomic level, everybody wins. As demand for female partners grows, so the wage gap (and hopefully discriminatory hiring practices) will naturally decline (For more information, see “The Economics of the Wage Gap Explained”).

For more information, please read:

  1. Statistical Evidence on the Gender Gap in Law Firm Partner Compensation (Marina Angel et al.) – September 9, 2010 (report).
  2. Hewlett, Sylivia Ann, Kerrie Peraino, Laura Sherbin, and Karen Sumberg. “The Sponsor Effect: Breaking Through the Last Glass Ceiling,” The Harvard Business Review: Jan 12, 2011, 90 pages.



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The Economics of the Wage Gap Explained

In the same year, Wheel Of Fortune darling Vanna White was born, 13-year-old Bobby Fisher became chess champion, Physicist Gordon Gould invented the laser, and Nobel Prize winner Gary Becker wrote The Economics of Discrimination. In his book, Becker argued that discrimination as a result of prejudice by employers leads to economic inefficiency; therefore, the more competition and free market behavior, the less likely employers would be able to get away with discriminatory hiring practices. That was back in 1957.

Today, in 2013, America continues to be a country of high-stakes competition, strategy games, and the litigious long haul (Gould spent thirty years fighting the U.S. Patent and Trademark Office to obtain patents for his laser and related technologies). Women in all professions have fought prejudice and lower compensation for decades. If Becker is correct, shouldn’t the inefficiency of a gender-biased wage gap have been eradicated by the market long ago?

Alas, gender bias is still pervasive in America. According to a study conducted by The Women in Law Committee of the State Bar of California, 85 percent of female lawyers surveyed noticed a slight but persistent gender bias in their position, and nearly two-thirds of surveyed female lawyers agreed that they were not accepted as equals by their male colleagues.

The effect of such a bias is great. Women comprised less than one third the total number of legal professionals in the U.S. in 2009, although they accounted for nearly half of all J.D.’s awarded for that same year, according to the American Bar Association. Furthermore, women accounted for a mere 15 percent of General Counsel in Fortune 500 Corporations and 24.7 percent of District Court Justices in 2009. Finally, gender bias places women in law, like many other industries, at the losing end of the wage gap.

Both female equity and non-equity partners are compensated less on average than male partners, despite operating at equal productivity levels, according to a Temple University Legal Studies Research Paper. However, this discrepancy is not limited to partnerships. The study found women in the legal industry in general, regardless of their position, were all paid less than their men counterparts.

Since law firms are more common than Starbucks these days, in a competitive market, the demand for employees who cost less but produce more should be growing. At least, that’s what Becker would opine:

For example, a biased monopolist might hire a more expensive white worker even though a cheaper black one was available and up to the job. But if another firm entered the market, it could produce its goods more cheaply by hiring the black worker that the monopolist had turned down. By discriminating less, it could undercut its blinkered rival. Mr. Becker did not argue that competition would get rid of bias or even necessarily reduce it. Rather, he argued that competition could greatly soften the economic effects of a given amount of bias on the part of employers. His model also implied that competition would have a greater effect where the existing degree of bias was greatest. “Race and red tape: One unsung benefit of financial deregulation is greater colour-blindness”

                Nov 13, 2008 from the Print Edition of The Economist

An especially distressed economy becomes rife with competition. Among law firms, competition exists for penny-pinching clients. Among associates, competition exists for a limited number of jobs against an overabundance of candidates. Once law firms realize the market has undervalued the price of female attorneys, the demand for them will only increase. As this demand is filled, the price (think, salary) of female attorneys will increase. To compete, men will have to settle for lower compensation, thus (in theory) decreasing the wage gap between male and female lawyers.

Sadly, Becker is right—economics alone cannot eliminate prejudice. But, in a recessed economy where the bottom line matters most, perhaps economics can at least give the appearance of gender equality and impartiality until societal mores catch up. So… here’s to hoping.

For more information, please read:

  1. Statistical Evidence on the Gender Gap in Law Firm Partner Compensation (Marina Angel et al.) – September 9, 2010 (report).
  2. http://www.lectlaw.com/files/att06.htm

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