Remuneration in big law firms: quantity or quality?

Carlos de la Pedraja. Professor. IE Business School

22 March 2013

The changes now taking place in law firms are here to stay and they have brought with them a need for new remuneration models that are more focused on offering a more complete compensation package, which will enable firms to adapt to the times with losing talent.

For some years now we have seen big changes taking place in the legal sector. Different business models, different ways of lawyering, the outsourcing of certain legal services, different billing methods, etc. But the biggest change of all lies in the power acquired by the corporate client, which has increased exponentially with the current economic crisis.

All these factors have converged to make traditional remuneration systems show signs of burnout and being no longer fit for their main purpose, that of attracting better talent, motivation, and, of course, retaining the best lawyers in the firm.

The latest (2012) comparative analyses of remuneration in Spain-based law firms drawn up by Signium Internacional and recently presented at IE reveal some highly significant figures.

The salary level of lawyers is going down at every level (entry, junior, associate, head, director, partner). The drops are not drastic in terms of the fixed part of the salary, but are far greater when it comes to variable aspects. Directors and partners are receiving the brunt of these changes.  The variable part of salaries is most affected due to general bottom-line results and firms’ failure to grow. The study also revealed how firms are starting to fix a variable component at lower levels, thereby transferring part of the risk to more junior lawyers.

These data from 2012 have coincided with a drop in hiring figures (fewer entries of junior lawyers) and slower career development, which occasionally results in lawyers leaving the firm.

Is this due entirely to the current crisis? Will law firms ever go back to earning the same level of money as before? Will lawyers continue to earn the same salaries as those received to date?

The answer to these questions is a resounding NO. In the lawyering profession too, change is here to stay. The law firm model that had worked from the very beginnings of the profession is running out of steam, and the appearance of new law firms with a different approach to legal services is already a reality. Obviously, in the light of this scenario remuneration systems have to change. 

In other parts of the world, the US for example, drastic changes have been taking place in the legal profession and in its remuneration systems since 2009. A lawyer in his or her first year in a large US law firm now earns 35% less than the new lawyer back in 2009, and the same lawyer in a mid-sized office has seen a 17% drop.

But from my point of view, the dilemma does not just lie in how much the lawyer earns, but also in what he or she has to do to earn it. More than remuneration, I am now talking about the total compensation systems, which make lawyers feel more motivated, enabling them to exercise their profession in a totally different environment. With more flexibility, more cooperation, more autonomy and greater participation in decisionmaking.

All these factors, coupled with career development (and not necessarily in terms of promotion) will form the basis of remuneration levels in the sector over the next few years. Law firms that are capable of placing the right value on these aspects, and which focus not only on the “how much” but also on the “how” they compensate their lawyers, will be the ones that attract, and definitely retain, the best professionals in the sector.
 

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