The New Normal
Lawyer Comp: The Third Rail of Legal Value Conversations
Posted Dec 21, 2011 5:11 PM CDT
By Susan Hackett
Note: In this two-part piece, New Normal contributor Susan Hackett, the former general counsel for the Association of Corporate Counsel, and now the CEO of her own consulting practice, Legal Executive Leadership, explores lawyer compensation in the New Normal. Here, in part one, she addresses the issue of firm comp from the end-of-year perspective, as well as the questions it raises for clients. In part two, next month, she'll address a framework that could suggest a more realistic method of assessing and paying lawyer comp—based on what legal work is worth, and based on valuation principles beyond what the inside and outside lawyers working on the matter would like to pay or charge.
It’s the end of the year, and we’re all sizing up the past 12 months and thinking about the next. With that comes the internal and external assessments of what our work this year was worth, how we got comped (or not), and what the future holds in terms of our financial well-being and the fiscal health of the legal marketplace in 2012.
For me, this assessment always takes place when there are lots of unfortunate stories that particularly draw my ire at a time when I’m otherwise occupied trying to focus on goodwill toward men. What is your reaction when you read the slew of articles and blog posts (from the National Law Journal and Above the Law) bemoaning (from every angle) the end-of-year bonuses announced by some large law firms in the last few weeks? (To be evenhanded, the current stories are always about the associate bonuses—we’ll read about how the partners took care of themselves soon enough when the Am Law 200 profit-per-partner reports come out in early 2012.)
How do you answer the immediate reactions of most clients to the news recently published, reporting on the average increases in billing rates charged in 2011 and the hikes anticipated in 2012? The data suggests that rates charged in 2012 increased—slightly outpacing inflation. Don’t you think clients are wondering why it is that the price of legal services outpaced inflation at all? Did costs go up? And what’s with the tone of the article, which suggests that the increases were thus incredibly modest—at the same time that profitability and partner comp increased substantially at many top firms, and modestly at most others?
However you respond, these questions are only the tip of a much larger iceberg on which the legal ship of state is about to run aground.
Large law firm lawyer comp is the pink elephant in the room that we refuse to discuss in public. It’s so relevant in corporate practice: not because corporate clients don’t have a huge selection of more reasonably priced and comped lawyers and firms to choose from, but because they choose to spend such a large majority of corporate legal spend on the largest firms with the highest comped lawyers.
And of course, we must factor in that this discussion usually takes place around the same time that many of the in-house comp reports and surveys—such as these from Corporate Counsel and Empsight—are coming out. They usually confirm that the average in-house counsel who hires outside firms makes only slightly north of what a bonused first- or second-year associate in a big law firm makes. There are a few hundred large law department top leaders who haul in comparable returns for their work—usually through nonsalary comp—but nowhere near the number or percentage of highly compensated partners that we find in the ranks at big firms where entire equity partnerships pull in hundreds of thousands or over $1 million a year in profit per partner.
The average in-house lawyer is well aware that he shares with those high-profiting partners the same schooling, sophisticated law firm background, and top-flight experience on his resumé. He’s made his choice, but please remember that he will more likely identify with the "99 percent"–and not the partnership–when he’s assessing who’s getting coal this Christmas.
Let’s get past the shrillness and frankly, the irrelevance, of who makes what and whether comp is fair, so we can talk about what we need to do to prepare to thrive as in-house and outside counsel in the future. And by “thrive” I mean sustainable profitability or income, not excessive lifestyles of the rich and famous, and not a meager existence that’s inconsistent with the comforts that professional status should bring us.
You Can’t Calculate What Lawyers are Worth if You Don’t Know What Legal Work is Worth
For me, these conversations aren’t about what lawyers are worth or want to be worth, but rather
1) What lawyer work is worth in today’s markets.
2) Whether large law-comp expectations will survive for more than a minority of large law lawyers.
3) Whose metrics and methodologies we’ll use to calculate the price and value of legal work going forward.
Here’s how I’d start to crack the nut (and I’m sure there are lots of other ways, too, so maybe you’ll join the conversation to share your ideas):
Consider this: If the worth of any particular legal matter is not what the firm wishes to charge to work on it, and it's not the lawyer’s hourly rate, nor the number of hours she may have invested solving the problem, then it's what the client (meaning the end-company client or the represented individual) values the work to be worth. In this context, what tools will in-house counsel and firms begin to deploy to assess and determine the value of legal work to the client? And will clients and firms work to standardize and adopt consistent processes that will make this conversation much more meaningful and simple over time?
This is an especially difficult question when any examination—by firms or by clients—of “historical” or “average/market” legal expenses drawn from past billings will be largely based on the same hourly/rate-based work models we’re looking to move away from. If the point is to assess the worth of the work going forward from the client’s perspective and not from firms’ previous price tags, this exercise may be a place to begin to create guideposts, but it will not be the end that we seek. Nor will it be a meaningful metric when we eventually have to connect the worth of the work to the comp that flows to the lawyers who propose to offer that work to clients.
Many lawyers without business training or a grasp of business tools struggle to translate finance concepts of valuation to law, but it seems to me that there are lots of folks in companies (isn’t that where in-house lawyers work?) who are really good at just this: valuing the worth of both services and other intangibles that the company needs to assess. Perhaps corporate counsel and even their law firms might start by asking some of their colleagues in finance/accounting to lunch, and then to assist them in constructing some simple frameworks.
In the second part of this article, coming in January, I would like to explore another method of assessment that creates a framework for discussion based on analogy to another form of valuation of a difficult-to-price resource: real estate.
In the meantime, let me know in the comment section what valuation techniques—beyond billable hours of lawyers—you deploy to determine the worth of legal worth.
Susan Hackett, CEO of Legal Executive Leadership, is the former senior vice president and general counsel of the Association of Corporate Counsel.
Editor's note: The New Normal is an ongoing discussion between Paul Lippe, the CEO of Legal OnRamp, Patrick Lamb, founding member of Valorem Law Group and their guests. New Normal contributors spend a lot of time thinking, writing and speaking about the changes occurring in the delivery of legal services. You're invited to join their discussion.