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What is happening to the pay of law partners?

This new and important paper (scroll to p.29) has lots of useful information:

...the average profits per partner in the top 50, top 100, and top 200 U.S. law firms in 2004, respectively, were $1.26, $1.01 and $0.83 million. These averages are the averages of the average profit per partner for each firm. The medians of the averages are lower, at $1.08, $0.86 and $0.67 million. These profits accrued to, respectively, 11,034, 17,861, and 26,755 partners. Average profits per partner exceed $2 million for 9 firms; they are at least $0.5 million for 93 of the top 100 firms, and 152 of the top 200 firms...Based on these distributions, we estimate that 14,351 of the 17,861 partners in the Am Law 100 earned more than $0.48 million in 2004...It also is worth pointing out that the 26,000 plus equity partners at Am Law 200 firms earn a total of roughly $22 billion (at $0.83 million per partner). This is the same order of magnitude as the total pay to non-financial top executives, investment banking MDs, hedge fund investors, and PE and VC investors.

It is no surprise to hear that partner pay is going up in real terms:

...lawyers have experienced a large real increase in pay over the last 10 and 20 years. In 1984, the average profit per partner at the top 50 firms was $0.309 million or $0.498 million in $2004. By 1994, the average profit per partner had increased to $0.531 million or $0.636 in $2004. And by 2004, the average profit per partner at the top 50 firms had increased to $1.260 million.

Erasmus_:
Yet partners are complaining about giving associates a 10k raise!
7.21.2007 11:53am
Pon Raul:
When are you going to post some more on your supersecret blog?
7.21.2007 12:36pm
BGates (www):
"These averages are the averages of the average...."

That's just good writing.
7.21.2007 1:11pm
Waldensian (mail):

Yet partners are complaining about giving associates a 10k raise!

Who and where are these partners? How much are these associates being paid now?

Maybe these underpaid associates would like to come and work for us, we're always looking for good associates. With how seriously they're being underpaid, you would expect a lot of them to be on the market.
7.21.2007 3:12pm
Rex:
Because law firms are typically structured as flow-through entities for tax purposes, the profit an equity partner earns should appear as ordinary income to the partner and will show up in the partner's AGI. As a result, average profit per equity partner likely provides a lower bound on the AGI of the average equity partner because it does not include non-law firm income earned by the partner.

I've wondered for a while about the relationship between reported PPP and actual take-home $ for partners, and so it's interesting to see this explained in this context. Is this the general understanding, that PPP is the lower bound on real partner compensation?
7.21.2007 4:13pm
Jim at FSU (mail):

Maybe these underpaid associates would like to come and work for us, we're always looking for good associates. With how seriously they're being underpaid, you would expect a lot of them to be on the market.


Comedy gold.

I suspect there is going to be perennial oversupply of junior associates simply because no one wants to hire the larval form instead of a full grown lawyer. Firms hire junior associates in hope that they will become somewhat useful in the future.

If your accomplishments prior to graduating didn't really reflect your perceived greatness, obviously you will have to prove that you at least have potential before you can start making the big bucks. Why would law firms shovel cash on an associate that appears to have only modest potential and no present usefulness?

The solution is to accept your crappy position and work your way out of it. As you develop a reputation for being a decent lawyer with some experience under his belt, more people will develop an interest in hiring you. As your value rises, the price eventually adjusts to match.

This was my experience in my previous career and I seriously doubt that lawyering will be much different. However, I am looking forward to going from a field filled with H1B visas and outsourcing into a patent law, which is even more supply-constrained than regular law.
7.21.2007 5:21pm
Dave Hardy (mail) (www):
I suspect there is going to be perennial oversupply of junior associates simply because no one wants to hire the larval form instead of a full grown lawyer. Firms hire junior associates in hope that they will become somewhat useful in the future.

They could have a simple solution, but won't take it. When I returned to AZ, I sent resumes to all the major firms. I had plenty of experience, in private practice and in the government, appellate and trial wins, references from my opponents (the best type, to my mind), etc. I kept getting replies that they had no openings for someone with my experience. I wondered what that meant, and called a couple of hiring folks up. Answer was that (except when there was great need for someone with a specialty), they wouldn't hire people with more than 2-3 years experience. Complicated the associate promotion process -- the other associates wouldn't like that someone who'd not contributed to the firm had come in, nor that they would ultimately be competing against a far more experienced fellow.
7.21.2007 6:10pm
Jim at FSU (mail):
It actually makes sense from a cost-containment point of view.

Consulting shops in the computer world operated the same way. Not bringing in mature talent from outside is a great way to avoid paying market value. As a junior programmer/ consultant/ seat warmer, you typically made crap wages out of school, and then as you gained experience your salary rapidly climbed. By jumping jobs I was often able to get 30-50 percent more salary per jump each year. Even with generous 10-15 percent raises for the best performers, they still end up paying WAY less than the market value in a few years. When I was 23 and leaving my job for a new one, there were guys that had been there for 6-7 years making what I was getting at my next job.

The obvious downside to this is that if you go too far below market value, you lose all your talent to competitors.

Bringing in well paid outside talent "complicates" the promotion process because your more talented people talk to the new attorney and realize they can double their money by jumping ship. Soon even your middle-rung talent starts to realize they have something to offer the marketplace and even they bail out. The only thing that prevents such places from imploding is clever partners preventing the clients from realizing they are no longer getting what they paid for.

IMO, the only people who bear the blame for this are short-sighted and greedy partners. If you are only willing to pay for crap, that is all you end up with in the long run. This is one of many reasons I avoided consulting shops after my first job. It was just an elaborate form of parasitism by which higher-ups fool the workers and the clients that each is getting more value than it really is while keeping the lion's share for itself. Very clever dance while you can keep it up.
7.21.2007 6:36pm
AppSocRes (mail):
An interesting inversion of the usual laws of supply and demand: As the number of lawyers per capita increases so does the average remuneration of lawyers. I suspect this longitudinal trend in the US is mirrored in cross-sectional comparisons of the US with other countries: The lawyers in those countries with fewer lawyers per-capita than the US make less money - on average than US lawyers. All this provides additional confirmation of one sage's observation that the primary function of lawyers is to create business for other lawyers.
7.21.2007 6:46pm
Jim at FSU (mail):
It's not an inversion if demand is increasing faster than supply.
7.21.2007 7:04pm
Pon Raul:
I think that AppSocRes is saying that the supply is causing the demand. Regardless, I don't think that every lawyer is having such a great increase in pay, just the few partners lucky enough to work for the big law firms. His averages are only of the top firms.
7.21.2007 7:30pm
PDXLawyer (mail):
I've wondered about AppSocRes' point, and my conclusion (bolstered by some observation) is that justice is a superior good/service. Generally, as incomes rise, the demand for all sectors of goods/services does not rise equally. Some goods, like lawyering, consume a larger fraction of income as incomes rise.

One example of a superior good is private airplanes. At least within a certain income range, the richer one is, the more one spends on private airplanes. As incomes rise, the demand for private airplanes rises to an even greater degree tha overall demand. An example of an inferior good, I understand that demand for tobacco products is negatively related to income - that is, the more money you make the less you spend, on average, on cigarettes. I think this is true of both litigation and transaction services.

Divorcing couples (the ultimate litigation) who make $30,000 per year each are much less likely to engage in a costly battle over custody or whatever than ones who make $300,000 per year, each. They want and need a public drama. Of course, the poor want and need public drama just as much, but they can't afford the actors to produce their private plays.

As to transactions, people who have a lot of money are much more risk averse. Transactional lawyers are a form of insurance - someone to look at your transactions and point out or help avoid problems. In a lot of ways, lawyering a small deal is harder than lawyering a big one because the issues are just as complex but the budget for dealing with them isn't as much. If you're doing a big deal you just paper the heck out of everything - with a small one you have to exercise some judgment.

I was also wondering if there has been a trend in the leverage of big firms in the recent past. Law never went through the super-aggregating phase that accounting did, but one of the things that happened there was that the number of associates per partner increased dramatically. My sense is that major law firm average size is growing slowly, so I wonder if their leverage isn't rising as well.
7.21.2007 8:28pm
frankcross (mail):
AppSocRes, I suspect you will find that applies across the occupations. The places with more investment bankers have higher pay for investment bankers. The places with more software engineers have higher pay for software engineers. The places with more CEOs have higher pay for CEOs. Think about it.
7.21.2007 10:40pm
Waldensian (mail):

Divorcing couples (the ultimate litigation) who make $30,000 per year each are much less likely to engage in a costly battle over custody or whatever than ones who make $300,000 per year, each.

Unless the $30,000 litigants have free lawyers. Family law pro bono -- what was I thinking?!?
7.22.2007 12:40am
SenatorX (mail):
To bad the dollar doesn't buy what it used to...
7.22.2007 12:46am
Mak:
This figures don't really tell the whole story, and Partners make significantly less money than these PPP figures would indicate. PPP is a meaningless statistic meant to make people feel like the big shots that they think that they are and deserve to be.

Real take home pay is significantly less than PPP, which does not wind up in Partner's pockets at the end of the year. Most firms take 20% of PPP as a partner's "Capital Contribution," which although technically raises his or her "Capital Account", is money that most partners will never get to see until well after their retirement. Still, the partner must pay taxes against these amounts. As such, about 60% of a Partner's PPP turns into a salary equivalent.
7.22.2007 11:23am
Martin Ammorgan (mail):
Successful plaintiff's attorneys dwarf those figures. A guy at the bottom of my law school class made about 6 years worth of partner salary from phen-phen litigation, and he didn't even spend more than 600 hours on it. God bless America.
7.22.2007 12:36pm
TerrencePhilip:
Martin,

no doubt some lucky wildcatters will strike it rich. I've never worked at a big firm but it appears these numbers are firmwide averages; if you are a partner at a large firm you periodically have the opportunity to buy shares of the firm, so that a big-firm lawyer can eventually be taking home several multiples of the "profit per partner" of the firm. Plus if your own billing as partner puts you way above the firm average, I'm guessing you keep a larger share of what you bill.
7.22.2007 12:52pm
Dave N (mail):
I spent yesterday with my five-year old grandson. We went to a strip mall carnival, had multiple squirt gun fights, and I watched him ride his Spiderman bicycle.

I mention all of this because I made a decision at the beginning of my career that there were more important things than the pursuit of capital. I work for the government and make a comfortable living--though substantially less than many of my private practice counterparts.

I generally have my weekends off and I don't have to worry about billable hours. There is definitely something to be said about quality as opposed to quantity.
7.22.2007 1:11pm
JohnCK (mail):
Why am I the only one here disturbed by this? Is there any evidence lawyer produtivty has exploded to such a degree to justify these kinds of raises? I sure don't see any. What I see is further evidence of the legal profession's successful rent seeking and drag on the more productive sectors of society. Where is this money coming from? My guess is legal shakedown rackets like shareholder derrivitive suits and class actions and shady billing practices and like. Even as a lawyer, I don't see this as good news.
7.22.2007 6:41pm
Obvious (mail):
The demand for lawyers will continue to grow as consumer activists and society in general attempt to root out corruption at the top. few acts have brought a bigger increase for that demand than the post-EnronWorldCom Sarbanes Oxley Act of 2002, which created a number of new standards and filings that now require more lawyers.

the share that lawyers get today is still small compared to the humongous shares that today's executives ask from their own companies. what smart minority shareholders now want is to play the lawyers against the executives so as to keep them in check. reasonable? i think so
7.23.2007 10:55am
Kenvee:
I have to laugh at the "underpaid associates" remarks, considering one large firm in Texas just sent out an announcement last week that they were raising their first-year associates' salaries to $160k. Folks in my prosecutor office were almost crying, considering felony chiefs with ten years of experience make about half that.

But then, as Dave N pointed out, we get to have a life outside billable hours. I do enjoy my weekends. :)
7.23.2007 12:18pm
Obvious (mail):
To Kenvee:

you probably think it's not fair that experienced prosecutors get paid so much less than starting corporate attorneys, but don't forget that the people that go get government jobs are usually from less prestigious law schools. look around right now and tell me how many ivy league people do you see?

hence there is fairness. the better the school the higher the pay.
7.23.2007 2:30pm
Trevor Hill (mail):
You guys are completely ignoring how ridiculously inefficient most law firms have been.

The bigger they get, the more they inevitably will gain in efficiency, as they are forced by circumstances to adopt some of those new-fangled computers and gadgets.
8.14.2007 3:09pm

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