What To Do About Associate Compensation

April 9th, 2009 by Jim Cotterman

Yet another article today about associate compensation (see How Low Could Associate Salaries Go?).  If its not complaining about how high they have gone; its talk about how low they might go.  Then there are the ever-present pieces on moving away from lock-step compensation programs; or clients forbidding the use of 1st and 2nd year associates on their matters.  Enough talk already!  How about some action?

First, the market bid up associate compensation because large law firm hiring demands put severe pressure on the limited supply of new law school graduates. 

Second, billing rates increased well in excess of inflation for three decades.  Pretty easy to have significant real wage growth in that environment.  And it permeated throughout the associate and partner ranks.

Third, the clients went along with all of this.  They paid the ever increasing rates and did little about it.

Fourth, the associate lockstep compensation programs are well matched to the metric they are measured against.  No, its not billable hours but the value of their time (hours times rates — again the ever increasing rates).  The strength of the relationship between the value of their time and compensation is remarkable at .92 where 1.0 is the maximum value.  Can you get more merit driven than this?  Not if you want any ability to consider other aspects of the associates’ contributions.  In professional services where the model is selling the value of your experience and expertise, then the foundation of any compensation program has to measure time value.

Fifth, if associate compensation free-falls, then it most likely does so for the same reason it climbed so high in the first place.  It is following the revenue!

What is wrong with this picture?  Well if you are an associate who has paid or is paying the debt on a six figure law school education there better be significant earnings or you made a bad economic investment.  If the change is permanent then the change will cascade back to the law schools who will see their own economics come under assault.

Now here is the game changer.  If clients are really serious about getting value for what they pay in legal fees, then they need to get serious about containment of billing rate increases (maybe even rolling them back — Wal-Mart anyone?).  We will leave alternative fee structures for another day.

This entry was posted on Thursday, April 9th, 2009 at 6:59 am and is filed under Economics, Associate compensation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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