November 29, 2006
Amway, HerbalLife and your local corporate law firm. Not three businesses you’d usually find discussed in the same sentence. But it could be. Some observers are calling corporate law firms “giant pyramid schemes.”
Between fresh-out-of-law-school attorneys and the idea the common law firm structure is outdated, it’s surprising more people haven’t seen the connection between pyramid schemes and legal firms.
A young attorney makes around $150K a year before even being qualified to make coffee for the partners. Why? Here’s a brief overview.
When someone graduates law school, they tend to believe they are equipped to practice law. The single thing they are qualified to do is to use the restroom in a law firm.
A new attorney doesn’t know anything about practicing law. The persons who teach law school are seldom the same individuals who practice law. At the top schools, most professors went direct from a top school to a top LLM business — to instructing. Many never even worried about taking the bar exam.
A law school graduate is scratch-and-sniff new, off-the-shelf and still in the crate. They believe they have experience since they interned at the firm and penned two memos. All they accomplished between expense account trips for the obligatory golf outing and tossing shots at the Lower East Side dive du jour is the ability to do elementary research.
So what can be done with these enthusiastic lads and lassies? They have to be turned into attorneys — somehow. Since law firms have no concept of whom will be beneficial and those which won’t be, law firms have to catch them all and arrange them later.
Voila! Hence the law firm composition.
The highest volume of new “attorney hires” — the first years — fall into the lock-step progression of “up or out.”
The associates along the bottom catch and channel money to the elites at the top. At Sullivan & Cromwell, the average partner earned just over $2 million last year. A new attorney, billing 2,200 hours brings in about a half-million for the firm. Of that, just $150K goes to the rainmaker’s salary. Multiply those figures by the number of associates, and it is plain why law firms are interested n growing the number of associates.
As the base increases, the chances of becoming a partner shrink. The income for new associates has to rise to entice new lawyers to join the pyramid. Formerly a lawyer was golden once they reached partner. No longer. That cake is shrinking, and the partners get ravenous.
To justify the work required by associates, firms typically toss more attorneys into a case and are aggressive when litigating and challenging even small issues that may go uncontested otherwise.
Latham and Watkins are to blame for first-year lawyers making over $100K. Pay for new lawyers used to be based on location, firm size, the value of the firm and cost of living. Someone slaving at ACME Law Firm in Nashville would make about 2/3 as much as someone toiling at Dewey, Cheatem & How in Manhattan. Often there’s an enormous cost of living variation.
In 1996, Latham decided to implement standardized salaries predicated on their New York salaries. So someone living in Raleigh, NC would bring home New York City-sized bling.
All major firms followed suit with standardized pay raises. New lawyers cheered, and applications came into law schools at tsunami rates.
Then partner financial gains started dropping off. Partners began to get brutal. No more partner tenure. Partners defected taking important lawyers — and clients — out the door with them.
And another international law firm is born.
There’s a better way to do all this, but it won’t change soon. The structure is still making money for rich guys who control the things that powerful people care about.