Welcome to the blogosphere to the Legal Profession Blog, by Jeff Lipshaw (currently visiting at Tulane), Michael Frisch (Georgetown), and Alan Childress (GWU, currently visiting at Tulane).
[M]y experience with law firms as partner and customer is that they may well be perfect laboratories to test the predictions of competing economic theories. My casual experience is that nothing will tell you more about your upcoming relationship than knowing how the firm’s internal compensation system works, not only as a matter of partnership or LLC operating agreement, but as a matter of culture. Here’s an example of contractarianism gone wild. Some years ago, when I was leaving AlliedSignal, I was approached by a smallish suburban Detroit law firm whose compensation system worked like this. As the “rainmaking” partner for a piece of work, you controlled the profits. If you needed tax work on the deal, you had to go to one of the tax partners and negotiate a split. (It’s entirely possible that the system worked for relatively independent trial lawyers; I couldn’t imagine trying to rope in everyone I needed for a deal.) The next time I encountered a system like this was negotiating a “preferred global law firm” deal with a major U.S.-based international firm. I was told that if the U.S. office agreed to too much of a discount, it would not be able to entice its sister offices to participate!
Law students, too, would profit (pun intended) by putting some effort into studying the economic models built into their prospective employers. More below the jump.
As a first-year summer associate, twenty-plus years ago, I was fortunate to work for a young partner who shared a wealth of information about the economics of the pyramid that characterizes most law firms. In a lock-step promotion system, the base needs to keep growing — and the folks at the top need to keep retiring — in order to keep the pyramid more or less the right shape. If the pyramid isn’t the right shape, the right training doesn’t happen, people don’t get new and broader experiences as they mature as lawyers, new leadership doesn’t develop, etc. At least as important, if the base isn’t broad enough, the top doesn’t eat. If the top eats too much (that is, if they monopolize the profits, and eventually, if they don’t step aside), the middle bulges, and the middle either needs to get shaved off, or the bottom needs to expand even more, or both. This was in the days before mega-entry level salaries, before non-equity partners, and before multi-tier partnership systems. I wasn’t in a position to do much about those things as they happened around me, but having learned all of this background stuff early on, none of it came as a surprise. Look at the mobility inside a given firm to gauge how you’re going to be treated as a junior lawyer — and even as a senior associate, and junior partner. Do junior partners jump ship because they despair of future career opportunities if they try to move up the ladder? That may be a bad sign.
The other thing that my then-mentor advised was to study the ratio of the compensation of the most highly-rewarded partner(s) and the compensation of the least highly-rewarded partner(s). This isn’t the only thing to look at in a law firm partnership structure, and a high ratio isn’t necessarily bad and a low ratio isn’t necessarily good. But it’s an interesting piece of data, if you can get access to it. The greater the ratio (a variety of other things holding equal), the less equitable the distribution of power within the partnership — and the less any given lawyer in the firm is beholden to any single partner. I practiced at two law firms that were, in their day, at the opposite ends of this particular spectrum, and there’s no question in my mind that the differences in law firm culture that I experienced were related to the difference in ratios.