Associates generally don’t have much room to negotiate salary or benefits in Biglaw. Beyond paying a premium for specialized skill sets (e.g., an engineering degree) or pedigree (e.g., a former Supreme Court clerk), those firms tend to pay a certain amount per class year with little variance among individuals. Among different Am Law 100 firms, there is relatively little variance. A few firms pay exceptionally well and a few others lag below market, but all the Am Law 100 firms have generally similar salary structures.
Not so with small firms, solo practices, and boutiques. According to the Robert Half Salary Guide, for example, the median starting salary for a first year associate at a ten-attorney firm in the San Francisco Bay area ranges between approximately $66,000 and $113,000 per year. That’s quite a spread. Of course, ten-attorney firms also vary so much from one to another that trying to compare salaries across firms often makes little sense.
Small firms thus have considerable flexibility in setting salaries, and associates have significantly more room to negotiate their salaries in the small firm environment. Granted, associates at small firms will tend to make less — sometimes significantly so — than their Biglaw counterparts. Be that as it may, valuing the worth of an associate to a small firm can be complicated.
Often, associates who are used to the Biglaw model both overvalue and undervalue their worth to a small firm or boutique….
For example, associates sometimes think that their value to the firm can be calculated by multiplying their hourly rate by the number of hours they are willing to bill in a year. A former Biglaw lateral, for example, might view 1,800 billable hours per year as a modest and conservative estimate of likely billable hours. 1,800 hours times hourly rate equals worth to the firm, right?
Often, the answer is no. Although I’m sure every firm would appreciate a lawyer’s willingness to work hard and to bill a lot of hours per year, that willingness to bill more hours doesn’t necessarily translate into more revenue for the firm. In many smaller firms, billable hours are more likely to be limited by the amount of work the firm has available than by the willingness to work.
For example, suppose a firm has 2,000 hours’ worth of excess billable work in a year. Suppose further that the firm is considering two candidates to perform that work. One is ready, willing, and able to bill 2,000 hours in a year, but the other is able to bill only 1,800 hours in a year. If the candidates are equal in all other respects, then the higher-billing one will be more profitable to the firm.
But suppose instead the firm has only 1,700 hours of excess billable work. In that case, both candidates will generate the same revenue for their billable work. The more valuable candidate, then, will be the one who can contribute more in terms of non-billable work and business development. That may or may not be the person who would have billed more hours.
An attorney’s expected billable hours also has limited use in setting compensation. I know this is crass, but when setting salaries, a firm inevitably will consider what it would cost to replace the associate. Billable hours are often fungible, and this website has well documented the glut of unemployed attorneys. When a firm receives dozens of résumés from highly-qualified candidates who to some extent are interchangeable, supply and demand dictate that compensation will suffer. Fair compensation is what the market demands to replace the candidate, not the amount a firm can make by charging its clients for the services.
It’s even worse than it appears. Multiplying an hourly rate by a “billable hour capacity” also is misleading because it fails to take into account that a firm may not charge its clients for every hour that its associates bill. For example, a firm might charge $300 per hour, but write off 33% of the billable time. For several reasons, it may prefer that approach rather than simply charging $200 per hour in the first place. In that scenario, multiplying the hourly rate by the billable hours might be grossly overestimating the revenue the work is generating.
Similarly, smaller firms, and especially newer small firms, might have a much lower collections rate than do large firms. Collecting from clients is a tough skill to learn and it takes practice. The easy solution to “get a retainer” works in principle, but I have written before about the various ways that firms are tempted to end up working for free. Associates need to consider that a firm does not collect everything that it bills.
Associates who rely on simple math also are likely to underestimate, if not ignore altogether, a variety of hard and soft costs inherent in running a firm, not to mention the risk. For this reason, too, it can be misleading to simply multiply billable hours by hourly rate when determining fair compensation.
As noted, smaller firms often pay less than Biglaw firms. This makes sense if working in a particular small firm means billing, and working, fewer hours. But associates at smaller firms might not just make less overall; they often earn less per working hour, too. This might be justified if the quality of life during the working hour is better. In other words, working an hour in a relaxed, casual environment might be worth more to the employee than an hour spent working for partner Joeffrey in a Biglaw hell. That extra worth may well justify a lesser hourly wage.
I know all of this may sound depressing and cynical from an associate’s perspective, but I don’t think it should be. The key is to demonstrate that you are not, in fact, fungible. In other words, show that you bring unique value that cannot easily be replaced. This may be discouraging to associates who have learned only to value their ability to bill a lot of hours, but it can be liberating to those with untapped potential to excel in other ways.
The smaller the firm, the greater the relative importance of each employee. Each associate’s potential should far surpass being a cog that can churn out billable hours. The ability to work without supervision, to interface effectively with clients, to make the work environment more pleasant; these are just a few of the many ways that associates can add value that does not necessarily translate into a mathematical calculation.
Of course, the ultimate key to the success of every firm is generating new business. In this economy, finding candidates who are ready, willing and able to provide quality billable hours is not that hard. The key to earning increased compensation for attorneys at small firms is demonstrating the willingness and ability to actually generate new billable work and to add to the firm’s profitability over and above billing hours. If the firm can bill and collect from new clients that you bring in, then your value to the firm increases dramatically.
For those all caught up with time, you’ve got to deep-six your wrist watch. The great legal moralist Tyler Durden put it this way, as I recall: “You’re not how much money you have in the bank. You’re not the car you drive. You’re not the contents of your wallet. You’re not your @#$!
In other words, you are a unique individual, with special attributes. Especially for a small or boutique firm, the value you bring surpasses your billable hours. Viewed this way, a firm actually might be willing to pay an associate more than might be apparent from a simplistic consideration of billable hours.
Tom Wallerstein lives in San Francisco and is a partner with Colt Wallerstein LLP, a Silicon Valley litigation boutique. The firm’s practice focuses on high tech trade secret, employment, and general complex-commercial litigation. He can be reached at [email protected].