Am I Underpaid?
How much should a major Am Law attorney expect to earn?
Michael Allen
Ed. note: This is the latest installment in a series of posts from Lateral Link’s team of expert contributors. Michael Allen is the CEO of Lateral Link, Chairman of the Executive Committee, and Co-Managing Principal/Founder at Lateral Link. Based in the Los Angeles office, he focuses exclusively on Partner and General Counsel placements for top firms and companies.
Most lawyers at Am Law 200 firms don’t ask whether they are overpaid. Most of our candidates genuinely believe they are either underpaid, or at most, compensated at market. That begs the question: How much should a major Am Law attorney expect to earn? Here are a few essential questions you may want to ask to get a better sense about your compensation.
1. Lockstep. If your firm is lockstep, you don’t really have much wiggle room to negotiate. Your question is more related to the difference between the profitability of your firm as compared to the profitability of your practice. On the high end, firms like Quinn, Irell, and Wachtell operate at around a 60% profit margin. That means for every dollar billed, around $0.60 goes towards profits. Firms on the lower end operate at around a 20% profit margin. That means for every dollar billed, around $0.20 goes towards profits. The reasons are sometimes obvious – leverage, bill rates, contingency wins, and fixed compensation of associates and staff. You should ask yourself: What is your practice’s profit margin, and is it more or less than that of the firm? If more, then you are likely cross-subsidizing others. If less, then stop reading this article and be thankful because you are likely over compensated.
2. Rule of Thumb. Although at most Am Law 200 firms associate compensation is fairly transparent, partners are oftentimes kept in the dark. Maybe a partner knows what she earned, as well as what the other 150 equity partners at the firm earned, but that doesn’t answer the question of whether the compensation is fair. Firms differ in the ways they credit some partners for originations as opposed to others for servicing the work. Even one step further, how transactions and matters are chopped up for credit purposes is oftentimes not all that transparent. For these partners, the best rule of thumb is to determine a percentage based on your originations. For highly leveraged practices, the percentage should be less than practices where the partner originates and services her own work. The 33% number most partners expect is actually higher than what most deserve (and actually receive). An easier way to draw lines in the sand is based on book size. If you originate around $1 million, you should expect around 40% (assuming you are working your own matters and transactions). If your book is north of $5 million, the conversation gets complicated and you can’t rely on any rule of thumb.
3. Deadweight. If your firm has senior statesmen (or even young bucks) who are no longer bringing in the business but are compensated as legacy partners or pegged at certain profit shares that were previously required to attract and retain them, I’d dive into the effects on profitability. Some firms try to address this issue with mandatory retirement policies or annual profit share resets. We come across senior statesmen who are still the breadwinners but their firms are hesitant to make mandatory retirement exceptions. We also see that firms can’t effectively recruit profitable partners with wishy-washy commitments subject to year-end share resets based on a look-back period. The bottom line is that the more deadweight the firm keeps onboard, the less money in the kitty to distribute year-end to those who are generating a greater portion of it.
4. Lateral Move. The only way to realize more pay is to move to another law firm willing to pay you more because they place a higher value on your contribution. Have you approached your firm Chairman and asked for a 20% bump? Let me know how that goes over. Another firm may value your practice more than your current firm for real reasons. Maybe your practice fills a void for another firm and 1 + 1 = 3. Like with selling a business, if a company blends its revenue into another enterprise that generates a higher multiple. Maybe moving your practice to another firm with leaner costs and higher leverage would generate higher profit margins and therefore more compensation for your practice. There are myriad reasons why lateral moves lead to increased compensation for partners with portable business. One reason alone is that the acquiring firm knows they need to pay you more to move your practice. Your existing firm probably asks a different question – how much do I need to pay you to keep you happy enough not to leave. The delta between “happy enough” and “move your practice” is pretty significant, and you won’t realize the bump without putting yourself on the market.
I am happy to try to field your compensation questions, but even if I can’t schedule a time to discuss, my colleagues are also well versed in the dialogue. At Lateral Link we’ve placed thousands of attorneys, and through our experience, we have seen pretty much everything – both bad and good – so if you are considering a transition, don’t make the mistake of negotiating against yourself because you don’t have sufficient information. Even if you are down the line in conversations, we can help give you some advice that may really move the needle.
Lateral Link is one of the top-rated international legal recruiting firms. With over 14 offices world-wide, Lateral Link specializes in placing attorneys at the most prestigious law firms and companies in the world. Managed by former practicing attorneys from top law schools, Lateral Link has a tradition of hiring lawyers to execute the lateral leaps of practicing attorneys. Click ::here:: to find out more about us.
