David Lat has the numbers today on how much the top partners at Dewey & Leboeuf were making. At the top of the list are Berge Setrakian and Ralph Ferrara, both of whom made around $12.5 million in 2011.
As far as I know, the top recorded rate that any lawyer bills out at is Ted Olson’s $1,800. And obviously the amount of money that law-firm partners make is not the same as the amount they bill out at: they’re not just workers but they’re also part owners of their law firms, and share in the whole firm’s profits. But it’s still an interesting exercise to take annual income and divide it by billable hours to see what top law firm partners can make per billable hour.
And here’s the glorious thing: even if you assume that Setrakian and Ferrara bill 2,500 hours per year, that $12.5 million works out at an eye-popping $5,000 per billable hour.
Of course, at these levels, you’re not (just) being paid for the direct work you do for clients: what you’re really being paid for is bringing new clients into the firm and getting the firm revenue streams which can reach hundreds of millions of dollars. But there’s still a reason why those clients will follow you to the firm, and that reason is that the clients will expect you to do real work for them.
Which helps to clarify exactly where the value lies, in law firms. Junior associates get paid less money than they bill out at; partners get paid more money than they bill out at. At the same time, it’s very unlikely that the clients really think they’re getting $400 an hour in value from a relatively junior lawyer poring over boilerplate at 2am.
In other words, differences in billable rates are basically an accounting fiction, which is used to come up with a calculable final figure to be presented as the bill, but which do not actually reflect the difference in value between various strata of lawyers. In order to do that, you’d be better off dividing annual income by, say, 2,500.
If you’re earning $250,000 a year, then that means you’re earning $100 per billable hour, if you work really hard. And if you earn $12.5 million, that works out at $5,000 per hour.
All of which is to say that Ted Olson’s $1,800 is low. And I suspect that if you multiply the number of hours he bills per year by $1,800, you’ll end up at a fraction of the amount he’s actually paid.
Sure, but this is a (probably) necessary accounting fiction. A lawyer who is billing $1,500/hour and earning $3,000/hour may be able to give you all the advice you need on a 5-minute phone call. And that advice may be worth millions, not the $125 he could ethically bill. And even if he billed $6,000/hour, he could bill you only $500 for the advice. The value of legal advice is just too unrelated to the amount of time the lawyer spends giving it for hourly fees ever to reflect the true exchange that is taking place.
Theoretically you could pay a valuable lawyer a lump sum for his advice, but presumably that is frowned on because the client’s management has no way of assessing numbers that could get arbitrarily large. You need to be able to justify your legal budget, and you need to be able to compare law firms against each other in terms of how expensive they are. “Paid ______ $100,000 for 5-minute phone call” is, I would guess, hard for management to swallow.
A man takes his car to the garage to be fixed. “It’s making a funny noise…” he says.
“No worries,” says the (obviously Australian) mechanic “I’ll take a look.”
The mechanic opens the bonnet and looks at the engine. He then goes away to get a great, big hammer and hits the engine just once.
“OK, she’s fixed! That’ll be $100, please.” says the mechanic.
“What! For that? All you did is hit it with a hammer, it took less than 5 minutes! How can you justify that?”
“Ah,” says the mechanic, “that was $1 for hitting the engine, and $99 for all those years of learning and gaining the experience to find out exactly where to hit it!”
The question you should be asking is not “How much does he earn in an hour?” but rather “How much are his results worth?” I would rather pay for results than for lots of time spent without much result.
But there is this dichotomy of opinion between those who believe only working all the hours there are, irrespective of outcome, is laudable; and the others who believe in maximising their efficiency by producing the needed results in the shortest amount of time – and then going home.
I’ve done that read boilerplate at 2:00 am thing, and I can confirm that whatever I was billing was way too much for the quality of the work I did.
Great article. Thanks a lot. I especially liked it when you said if you’re earning $250,000 a year, then that means you’re earning $100 per billable hour, if you work really hard. I could not agree more.
Felix, no offence intended, but I think you need a crash course on the economics of professional services firms.
1) Partners take drawings out of profits. The profit is the difference between revenue and expenses. Revenue essentially comes down to ‘utililization’ (ie, how hard people work), rate (ie, fee per billable hour) and leverage (which reflects the number of professional staff v partners). Expenses is, well, self-explanatory (although many costs are in-fact passed on to clients).
2) Splitting the profits pie is an entirely different kettle of fish. Some of the older firms still split profits between partners equally (subject to traditional ‘lockstep’ structures). However, in recent years there has been an increasing tendency to take on ‘salaried’ partners. The idea here is that you find some dupe (I was one of them for many years) who is good at what she/he does etc, but who is willing to join the partnership on the basis that she/he takes a fairly low partnership drawing – say $350,000 per annum.
(I could write a lot more here, but your system won’t allow it.)
Yah, Nemo. $350k. That’s, like, nothing.
How ever did you survive? Wither your pride?
Sure,
How about converting the salaries of the CEOs, VPs etc into an hourly wage!!! These lawyers at Lebouf etc. are generally top of their professions and what they earn is a pittance compared to CEOs etc.
In fact, general councels at mid and large companies make millions annually.
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