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December 03, 2007


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saul levmore

Over in Volokh Conspiracy ( http://volokh.com/posts/1196794243.shtml ), Orin Kerr suggests that the salary/bonus allocation is a product of (1) salary as a signal of quality to uninformed associates, and (2) bonus as reward and incentive for billable hours. That's good though it does not explain why so many firms refrain from paying bonuses. We both like the idea of bonuses as reward or incentive (or reducer or resentment) but I'd still like to suggest that firms may be happy with some modest billers. The question is whether they can be supported in an equilibrium, or whether they will always be outflanked by firms that choose instead to raise base salaries in order to send a stronger "signal."


Rational firms in the top tier would be happy with modest billers, but I have yet to hear from a law firm partner who was happy with the 1750-hour-billing associate; surprisingly few law firm partners adequately understand the idea of marginal resources, and view the 1750-hour-biller through the cost-accounting system and think that they're losing money on the attorney once they attribute overhead costs. (I've even heard some partners claim that they lose money on second-year associates as a group.)


The small variations (as low as 5K in either direction) from the mostly lockstep class bonus are neither necessary nor sufficient to create multiple tiers of productivity. A more convincing explanation is that firms want to reserve the option of lowering total compensation in tough times in a more subtle way than by reducing base salaries. This helps internal morale and recruiting.

Michael E. Lopez

Firms prefer the predictability of knowing when most of their associates are going to leave (January-March). This is optimal timing, because it gives the firm several months to bring their new crop of first years up to speed.

The bonuses are, I think, primarily a way to regulate the inevitable departures. Associates stick around till December to get their bonus, and then leave ASAP so that they can qualify for the largest possible pro-rated bonus at their new firm (if any).

Transplanted Lawyer

Further to Michael E. Lopez's point, when I worked in a large firm, I was often told that the bonuses would be computed based on a calendar year's performance, and then paid in the spring. Of course, if you'd quit in the interim, you wouldn't get paid anything since bonuses were only paid to current associates. So, people had to stick around for several months, in order to actually collect those bonuses, which meant they missed out on the prime recruiting season when they could have gotten the best salaries offered by the firm's competitors.


meh, really

It is interesting that associates of British firms are said to be paid less than their U.S. counterparts, even though they are often billed out at higher rates.

Ugh...this is comparing apples to oranges. The legal market is different in the U.K. because the cost and structure of legal education and training is completely different. Of course the compensation structure for newly qualified and newly barred attorney will differ. I'm sure you know this (you are a dean), but opted against including it in this entry.

The big question is why?

Jeff Donner

2,500 "billable" hours in a year? Please.

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