Monday, December 03, 2007

Law vs. banking labor markets

Andrew Ross Sorkin posts:

At first glance, it makes sense in a free-market kind of way that law firms rush to match one another’s compensation packages. They have to compete for talent, especially for the annual crop of law school graduates. Indeed, if they never raised salaries or bonuses, they would probably be accused of conspiring to keep costs down.

But think about this for a moment: Is there any other business in which every competitor matches salaries and bonuses almost identically? It will probably take you far longer than a moment to come up with one, with the possible exception of highly unionized industries. Lawyers’ closest business cousins, investment banks, typically pay their people based on merit and the health of their own businesses, while still being competitive in a down year (like Merrill Lynch.)

The root of the problem may lie in the top law firms’ oddly egalitarian tradition of paying the same amount to associates at the same level. Many refer to it internally as “lockstep.” At some firms, that applies to partners, too, though that is becoming increasingly rare. And to be fair, some firms, though not necessarily the top tier, like Schulte Roth & Zabel, give bonuses based on billable hours, which critics say has the potential to encourage “bill padding” — a euphemism for fraud — or at the very least, a white-collar sweatshop.

Equal pay advocates say it fosters teamwork and prevents resentment. But it also does something else: It makes it so easy to compare compensation across firms that it becomes glaringly obvious when one firm is out of sync. In the rest of the world, employers often pay a range of salaries and bonuses for the same job, and no one is sure what the guy or gal in the next office is making, never mind the people at a rival firm.

Within their risk-averse, insular world, it’s a way of saying, “We’re in the top tier.” But it doesn’t necessarily make good business sense. Though partners at elite firms routinely pocket millions, law firms have never been run as efficiently as truly great companies. After all, they’re run by lawyers.
Personally, I am always surprised to discover another in-house counsel working in CT, who commutes from NY, sometimes in NYC. Quite dopey from an income tax perspective.

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