Legal Village

Banks better at sharing the pie than greedy law firms

Posted 1/10/2007 by Investment Banker

How much am I worth? Am I being underpaid? I recently asked myself those questions when I found myself in the office in the early hours and my mind wandered. But I’m conscious many young ambitious lawyers often ask themselves those same questions and I want to share my thoughts.

Although I am a banker now by profession, I was trained as a lawyer and I continue to watch the remuneration of lawyers with great interest. One of the reasons I left the legal profession was because I found the pay structure was flawed. The profession simply does not reward performance, especially for junior lawyers. I was a junior back then, I knew I could do better and I wasn’t prepared to wait out the years before individual performance was going to be factored into my total compensation. After all, there is a cardinal rule in deal-making: for every deal there is always a sucker, just make sure that sucker isn’t you.

For all the major City law firms, NQ pay is the same across the board, and the same principle applies to the increase in pay for junior lawyers for the first few years post-qualification irrespective of the department you are working in. Is that fair? I would say no. Corporate lawyers work longer hours and are put under a lot more stress than their peers in say, IP or real estate, but this is not reflected in the compensation of junior corporate lawyers at the end of the day. For the average City firm, it is quite obvious from a law firm’s annual accounts that the revenue stream from corporate dwarfs that of say, the IP department. So the obvious question is why do law firms fail to reward those that have contributed most? Why don’t law firms follow the model of investment banks, by allocating bonus pools as a percentage of the revenue brought in by that particular division over the course of the year?

At investment banks, total compensation consists of base salary and bonus, and in good years bonus can be a multiple of your base salary. Much has been said about greed in banking, but I would say banks are a lot better at distributing wealth to their employees than law firms where most of the profits are concentrated in the pockets of the equity partners. Good news if you are a senior partner, bad news if you are a junior lawyer. The flipside is that in bad times bonus pools shrink and people get laid off. One only needs to look at the current turmoil in the credit markets, this has left many DCM bankers without much to do and most have gone on extended holidays or have quit altogether. Few bankers expected the implosion of the credit markets, and many were looking forward to another record year for bonuses, but this just highlights how quickly tables can turn. However, provided you can stomach the job insecurity, the banking profession is more meritocratic than the legal profession. Top City firms would immediately stem or at least slow down the mass departures of lawyers from law firms to rival law firms or alternative professions if they introduced bonus as a driver of total compensation. Is that greed? No, that’s just common sense.