Law Firm 2.0 – Re-architecting the Law Firm –Compensation

It’s been a while, but continuing on my Law Firm 2.0 series and having discussed ways to more efficiently bill, keep associate retention issues better at bay and how to better deal with legacy cost structures, today’s topic is compensation.

I’ve gotten a ton of comments on my blog and on various other online forums where my articles have either been posted or summarized. Despite this high volume, it pales in comparison to the amount of direct emails that I have gotten. Most of the adverse communications have a variation of the same argument: but other people make more money than I do! Why are you after me?

For a whole bunch of lawyers mad at me, you sure provide a crummy response. Objection, your honor on grounds of relevance.

I’ve never understood why lawyers think they deserve to make the same as other lawyers at other firms or lawyers who practice in different areas of law. “Legal services” are not commodities. Rather, different specialties are valued more and less by society, just as they are in other fields like medicine and investment banking. In fact, even in the legal profession there are outliers, whether they are public defenders, or class-action plaintiff’s lawyers; each of them are on the ends of the respective legal compensation bell curve.

For this reason, I’ve always thought it was silly that folks who want to provide a particular set of services think they should get paid the same as other radically different practice fields. But this is the general attitude that you get inside a large law firm.

For instance, does it make sense that a lawyer working for a cash-constrained startup company on transaction documents between the company and its returning venture backers should make the same hourly rate as a litigator who is engaged in “bet the company” litigation for the same company? No.

And before you say that there are billing differences between types of work in forms of discounts to startups and billing premiums with M&A and IPOs, I would still posit two points: one, that these billing differences aren’t that meaningful and two, that the partners in these different practice areas judge their compensation across all practice groups and have expectations of equality.

It would seem to me that choosing a practice area could include not only the type of work, but also the amount of compensation that the practice would generate. I would have been very happy to give up some compensation in exchange for avoiding litigation and public company work.

The following is a direct quote from a well-known partner at a well-known Silicon Valley Law firm in an email that he sent to me (name redacted as his request). “You can’t run a large firm practice these days on $50K a deal unless you are just cranking them out. The expectations for partners at most major firms are simply too great to permit them to handle VC deals.”

To summarize, my point is that by only looking at cash as what a lawyer’s compensation is, rates are artificially high in some practice areas and those are the fees that are impacting startup companies. Lawyers receive “other” compensation in performing the types of services they want to and hours associated with those services.

One thing to discuss quickly is startup company equity held by the law firm (including directed shares). In the “old” days the shares were allocated to the team members performing the services. Other partners, however, got jealous and now most firms allocate equity across the entire attorney pool, whether directly or through a firm-run investment vehicle.

I have an idea. Why not allocate these equity pools only to lawyers who work on startups? They may charge less, perhaps make less, but like the startup, world would see nice returns when things go well.

All of this, of course is part of the competition for law firms to make as much money as the next firm. I’m always surprised when I find some lawyer at a competent, but not extraordinary law firm charge the same rates as a lawyer at a clearly superior firm.

I’ve heard the argument for years now that partner compensation isn’t just about what the lawyers take home pay is, but metrics like “Profits Per Partner” (PPP) affect attorney retention and hiring. I’ve never really understood if that is true, or is just ego. While in the Silicon Valley, I found this argument more compelling, but out here in Boulder, I see law students taking less salary for better quality of life. My bet is that even in the Silicon Valley, many lawyers would trade some compensation for better quality of life and therefore the PPP statistic isn’t as important as the law firms and magazines hold it out to me. Then again, perhaps this is akin to the U.S. World and News Report law school surveys that have caused a whole bunch of weird behavior on the educational side.