Why does BigLaw not pay an hourly wage? Forum

[ralph]

From what I understand, in BigLaw, you get paid $160k a year, and then some bonus. And at that (mostly) fixed salary, the strategy from the firm's perspective is to get as many billable hours out of you as possible. Since the cost of paying you is pretty much fixed, each extra billable hour they mark down increases their profit margin.

Considering employee turnover/burnout, why wouldn't a BigLaw firm just pay X dollars to their employees for every billable hour marked down? This would let employees work as much as they wanted for as much money as they wanted instead of this "Go-Big-or-Go-Home" mentality, while still letting the firm maintain whatever profit margin they wanted.

I understand there are fixed costs associated with hiring each new person, so if you wanted to keep the same volume of revenue with less hours worked per person, then you would have to hire more employees = higher fixed costs. I'm guessing that may be part of it. I suppose another reason may be that paying $X dollars for every hour billed may create a bad incentive for the employee to bill as much as possible, but that's happening in the current system already, right?

[mephistopheles]

we're professionals...

[Kafkaesquire]

we're professionals...

Does that really answer the question? Your response seems a bit circular in logic. (I'm not claiming to have a better response, though.)

[Danger Zone]

Check out the Fair Labor Standards Act, bro.

[hephaestus]

Because having associates be salaried is how partners at the firm make more money.

[Danger Zone]

The tl;dr is that employers pay a salary to white collar workers because then they are exempt from the FLSA.

[kalvano]

$350 an hour billed times 2,000 hours a year equals $700,000. That's what the firm makes off an associate, give or take som (yes, I know it varies, I'm simplifying).

That's why it's not hourly.

[badaboom61]

If a firm ties your bonus to hours billed, then they more or less will be paying you by the hour. Only a few firms (Boies Schiller, notably) actually do this to any meaningful extent, probably because most firms find that associates are more profitable when just paid the base wage plus a small lockstep bonus.

[quakeroats]

$350 an hour billed times 2,000 hours a year equals $700,000. That's what the firm makes off an associate, give or take som (yes, I know it varies, I'm simplifying).

That's why it's not hourly.

It wouldn't really matter if they paid salary or hourly as far as this is concerned. They just wouldn't pay the associate the rate the associate is billed at. They do this with contract attorneys already. Boies Schiller pays top billing associates the equivalent of a percentage of their hours billed, i.e., an hourly wage with a floor. The bigger issue is problems with turning exempt employees into non-exempt employees to whom overtime pay is due, but unless you're doing a lot of menial stuff that's unlikely to cause a problem. Even the contract attorneys haven't been successful there.

[mr. wednesday]

If it were cheaper for Biglaw to pay hourly, they would. But a set yearly salary is good for recruiting ($160k is more enticing than an hourly rate of around $80 for 2000 hours) and associates have plenty of motivation to work more hours through not wanting to be pushed out or fired. Why pay someone for every extra hour that they work when they're willing to do it for free?

[Pokemon]

Maybe because they want to have a standard costs related to wages rather than changing ones?
Maybe because they do not want have associate/partner conflicts where an associate might want to claim an hour as billable so he can get higher wage, but partner not so he pays lower wages?
Maybe because it is hard to account for waiting time that you have to be in office, but you are doing nothing billable?
Maybe because they want you to be available 24 hours without giving you the idea of getting away from availability by not being payed for those hours?

[ralph]

Maybe because they want to have a standard costs related to wages rather than changing ones? -> It would be trading off one variability for another: (1)Profit margin would be fixed, as opposed having variable profit margin like they do now, and (2) Total wages paid would be variable, as opposed to fixed ($160k) like they are under the current system. I'm not sure which one is more desirable from the firm's perspective.
Maybe because they do not want have associate/partner conflicts where an associate might want to claim an hour as billable so he can get higher wage, but partner not so he pays lower wages? This shouldn't matter. A billable hour benefits the partner just as it does the associate.
Maybe because it is hard to account for waiting time that you have to be in office, but you are doing nothing billable?You could solve this by not being paid for anything that wasn't a billable hour.
Maybe because they want you to be available 24 hours without giving you the idea of getting away from availability by not being payed for those hours?Had a little trouble understanding this. Are you saying the firm wants to make sure the employees are on call 24/7? If so, that makes sense.

Here's why I'm asking this in the first place. The BigLaw situation seems pretty crappy. You hear a ton of complaints from associates. I would guess such high turnover within just 3-5 years is undesirable, certainly from the employee's side, but also the firm's. Since the firm's revenue is based on something variable like the number of billable hours, why wouldn't the compensation be based off that same variable? You could let gunners be gunners and let normal people do their thing, while being compensated accordingly. I guess it doesn't really matter; I assume it's not going to change anytime soon.

[kalvano]

Being paid by the hour sucks. I want to know what my check will be every month.

[quakeroats]

Being paid by the hour sucks. I want to know what my check will be every month.

For most employees, it's six of one, half a dozen of the other. It's quite typical to pay entry-level people a "salary" of some amount that's really an hourly wage based on 40 hours a week. Unless one's hours change significantly week to week there's little difference.

[kalvano]

Being paid by the hour sucks. I want to know what my check will be every month.

For most employees, it's six of one, half a dozen of the other. It's quite typical to pay entry-level people a "salary" of some amount that's really an hourly wage based on 40 hours a week. Unless one's hours change significantly week to week there's little difference.

I don't really care how they arrive at what I get paid. I do care that I make about the same each month.

I've done hourly, commission, and salary, and everything but salary sucks.

[A. Nony Mouse]

I don't think there's any evidence the turnover in biglaw is a problem for firms, or they'd do something to change it. Most firms seem designed around a model that expects significant attrition between SA and partner.

[guano]

Maybe because they want to have a standard costs related to wages rather than changing ones? -> It would be trading off one variability for another: (1)Profit margin would be fixed, as opposed having variable profit margin like they do now, and (2) Total wages paid would be variable, as opposed to fixed ($160k) like they are under the current system. I'm not sure which one is more desirable from the firm's perspective.
Maybe because they do not want have associate/partner conflicts where an associate might want to claim an hour as billable so he can get higher wage, but partner not so he pays lower wages? This shouldn't matter. A billable hour benefits the partner just as it does the associate.
Maybe because it is hard to account for waiting time that you have to be in office, but you are doing nothing billable?You could solve this by not being paid for anything that wasn't a billable hour.
Maybe because they want you to be available 24 hours without giving you the idea of getting away from availability by not being payed for those hours?Had a little trouble understanding this. Are you saying the firm wants to make sure the employees are on call 24/7? If so, that makes sense.

Here's why I'm asking this in the first place. The BigLaw situation seems pretty crappy. You hear a ton of complaints from associates. I would guess such high turnover within just 3-5 years is undesirable, certainly from the employee's side, but also the firm's. Since the firm's revenue is based on something variable like the number of billable hours, why wouldn't the compensation be based off that same variable? You could let gunners be gunners and let normal people do their thing, while being compensated accordingly. I guess it doesn't really matter; I assume it's not going to change anytime soon.

There's a lot wrong with this. Profit margin is not purely based on lawyers' salary.
There are many reasons to not pay lawyers hourly. Go read some reports/articles on eat what you kill partnerships to see some of the problems inherent in such a situation.

For a quick list:
1) Legal matters may require sudden late nights, and an hourly attorney is more likely to say fuck it, I make enough, I ain't working tonight
2) in-fighting among associates for more hours
3) generally associates are not responsible for bringing in work and should neither be punished when there isn't any, or be rewarded when a lot comes in
4) retention of attorneys who don't want the risks inherent in going solo or starting their own firms
5) fixed cost obscures attorneys true worth
6) if you were to switch to variable cost/hourly salary, how should a firm account for other costs, like E&O, Malpractice insurance, rent, paralegals, tech support, custodial services, etc?

It's nowhere near as simple as what you imply. Switching is a big thing. A number of firms have taken a halfway approach by more closely linking bonus amounts to actual hours billed.

[Danger Zone]

We can stop answering now. The third and fifth replies already nailed it.

[TigerDude]

No it doesn't.

There is nothing stopping law firms from paying commission-based bonuses based on billable hours except inertia. $50/hr for 2000 hours plus a 60,000 salary would give you a $160,000 pay. And if you billed 3,000 hours you would make 210.

Overtime & professional workers has nothing to do with it.

There are a lot of ways to manage billable hour firms. Law firms are not the only businesses that bill this way.

[Summerz]

Perhaps this question skews the question, but nonetheless. You bill “×” hours, client doesn’t (or can’t) pay. Income wise, any adverse consequence to the associate (including bonus) under the current system?

[guano]

Perhaps this question skews the question, but nonetheless. You bill “×” hours, client doesn’t (or can’t) pay. Income wise, any adverse consequence to the associate (including bonus) under the current system?

ordinarily, what matters is how many hours an associate bills, not how many actually get paid. However, if the realization rate (hours billed / hours paid) is low, then the associate's job is at risk.