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.
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?
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.