Making Sense of In-House Lawyers’ Compensation

"What do I Have to Pay?"

Whenever Major, Lindsey & Africa (MLA) is asked to undertake a search for a lawyer to join a corporate in-house client (as distinguished from our law firm clients), the client invariably asks, "How much do I have to pay this person?" The question is understandable because, unlike law firms that are highly-attuned to the "going rate" for lawyers, corporations tend to hire with less frequency and also vary widely in the components of their compensation packages. These components may include all or some items from a long list: base salary; bonus; equity (in several forms, including stock, stock options, stock appreciation rights or SARs); long-term incentive (LTIP); sign-on bonuses; 401(K) and other pension benefits; various insurance coverages; perquisites such as automobile, housing assistance, travel & entertainment allowance; and – in the case of overseas postings – additional benefits such as COLA (cost-of-living-adjustment), education/school support, domestic staff, expenses for air travel "home," and other "perks."

To the basic question, "What do I have to pay?" my typical response is that there are two answers. The first answer is "market rate," meaning what a lawyer meeting the client's specifications will expect and accept, given the years of experience required for the job, the pedigree expectations, the scarcity of that lawyer’s expertise (for example, IP lawyers often command higher pay than other lawyers), and cost-of-living considerations. My second response is "internal equity," meaning what similarly situated people in the company receive as compensation. For example, suppose we are handling a search for a General Counsel (GC). I can probably find a lawyer who is so interested in the role that he/she is willing to take a compensation package of $200,000 (which is modest by lawyer and GC standards). This is, in a sense, market rate. But suppose that new GC arrives on the job and discovers that a peer executive, say the VP-Sales & Marketing, makes twice that much. Needless to say, you’re going to have a very unhappy GC on your hands. So, in most cases, the client needs to consider more than "market rate" by also considering "internal equity."

In-House Compensation in the Context of Law Firm Compensation

Legal industry observers often point out the differences between law firm practice and in-house practice, some of whom may suggest that a lawyer moving in-house from a major firm should be paid less than his/her law firm counterpart. However, earning capacity in a law firm does have a bearing on what the "market rate" should be for in-house lawyers. If the gap between the two is too large, then the best lawyers may be forced to make their employer choices based on economics alone, leaving the pool of in-house candidates short on qualifications (or they are so wealthy that they don't care about what the amount of their compensation). This is not what in-house clients want or deserve.

Assume, for example, that you have two lawyers who both ranked in the top 10 of their law school class, from the same school and graduation year. Both live in the same zip code and likely interact socially. Both pay the same price at the gas pump and at restaurants, both have kids to educate, families to provide for, and so forth. It's hard to imagine a scenario in which the law firm partner makes $500,000 and the in-house lawyer would be willing to make $100,000, unless that in-house lawyer receives distinct off-setting advantages (e.g., a much reduced workload or a leveling equity package). From a financial perspective, the candidate considering a move in-house is likely to find that move impossible and will continue on his/her law firm path (unless he/she has no choice in the matter, which raises an entirely different set of concerns).

In-house cash compensation needs to roughly track law firm compensation, at a discounted rate. Why do in-house lawyers get paid less? Why the discount? Some observers assert that in-house practice has compensating advantages (no pressure to bring in clients, a more manageable schedule, perhaps a lighter workload, the opportunity to be part of the company’s strategy-setting and execution, etc.) Even if these assertions are true, I think a better answer is that the market will bear this discount because going in-house is popular for other reasons, primarily being the challenges of making partner in a law firm.

The analysis goes something like this: Law firms routinely hire entering classes of associates of 20, 30, 40, and even more. Seven or eight years later, when it is time to name partners from that group, only a handful actually grab the gold ring (and this group might have included one or more laterals). If, then, five out of 40 are named partner, 35 lawyers (highly-educated and trained) have to find jobs elsewhere. A few leave the practice altogether (some for a non-law career; others to teach; others to become full-time parents). But a good chunk of those 35 lawyers have to find spots in other law firms (where they face the partner-making gauntlet again) or try to find an in-house opportunity. Supply of these lawyers exceeds demand, driving down the "price." But, as noted previously, the "price floor" has its limits.

Another reason for the discount (as a function of going in-house) may be the opportunity to "hit it big" in a corporation, an opportunity almost never found in private practice, outside a very few plaintiffs law firms. Our placement at Facebook retired after three years, with $60 million in his bank account. I have placed two GCs who each made over $1 million after being on the job less than two months – both of their companies were acquired; one of these lawyers tempted lightning to strike twice by going to another acquisition target. His bet paid off with another million in his pocket.

Charting In-House Compensation

If we are to discount law firm compensation to determine in-house compensation, we still need to understand the former. First-year associate salaries at the large, big-city firms (from which most corporate law departments want to draw their law firm candidates) are in the $165,000 range. Law firms pay this salary level because it's the "market rate." Some law firms certainly pay less, depending on firm location and size/ranking, but corporate clients tend to focus on resumes of lawyers who have entered the workforce under the $165,000 starting salary model. Incremental increases for each year of service are approximately $6,000-7,000. Second-years get $172,000; third-years are paid $179,000; and so on. Bonuses may be paid on top of these base salaries (and they tend to have a much broader range and vary widely from firm to firm).

Because most companies do not hire entry-level attorneys, they – by definition – hire lawyers with several years of experience. So, what's the in-house compensation range? The highest salaried lawyer in the company (almost always the GC) tends to set the "ceiling." The "floor," while not set by the law firm compensation level, is heavily influenced by firm compensation. In between the ceiling and floor, lies the range.

GC compensation varies from company to company, and for a more practical discussion, I will not factor in very high–or low–GC packages, because those skew the figures. For example, GCs at companies boasting revenues over $1 billion tend to make very high compensation, which is often a function of the rest of the compensation packages of C-level executives at those companies.* This refers back to how I initially began the compensation analysis as a bifurcated one: "market rate" vs. "internal equity." Assuming "normal" (non-extraordinary) executive compensation levels that require no significant adjustment for internal equity purposes, we see GC base salaries range from $300,000 to $450,000. (Again, there may be unusual situations such as a start-up that offers its executives very modest cash compensation, but loads the packages up with significant equity; I am not talking about those situations).

Champagne Taste on a Beer Budget

Let’s assume that the GC (a 30-year lawyer) makes a base of $400,000. Assume also that the GC wants to recruit a seven-year lawyer (someone who has not made partner). Since the seven-year lawyer makes $250,000 in a law firm, what would a company expect to pay? My estimate is that the company would likely have to pay $180,000-220,000, reflecting the "discount" accorded going in-house. The GC has some flexibility to massage this figure, using the array of other benefits and compensation components sketched in this article’s first paragraph. When I propose this salary range to my in-house clients, their reaction suggests a mixture of surprise and horror. They often are thinking along the $160,000 range, to which I point out that this is what entry-level lawyers make in a law firm. I also point out that if a lawyer is so desperate as to take a $90,000 "haircut," what does that say about the lawyer who would make such a sacrifice, particularly when the GC has just told me that the company’s expectations are as high or higher than in a law firm, in terms of hours, quality of work, responsiveness, and so forth.

Do I see this dynamic changing as more law firm lawyers leave firms to become GCs? They bring with them up-to-date compensation knowledge, in addition to the understanding that an alternative to paying top dollar to an in-house lawyer is to outsource the work to an expensive law firm, or make the Hobson’s Choice of leaving the work undone (or doing it themselves). My answer is no, I do not see this dynamic changing. As long as able lawyers can justify taking a $160,000 job–with its perceived compensating benefits–a buyer’s market will continue to exist. There will be some exceptions, but the fact remains that the pool of legal talent is a large one compared to the demand.

Bob will speak more on in-house compensation as part of a panel discussion at The Big Payback - A Candid Discussion of General Counsel Compensation Trends, hosted by DLA Piper, Towers Watson and Major, Lindsey & Africa November 12th in Houston. The Big Payback  event series continues with Towers Watson in Atlanta on November 20th.

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Robert A. Major, Jr. is the founding partner of Major, Lindsey & Africa. A former practicing lawyer, Bob is resident in MLA's Houston office and spends time in MLA's San Francisco and Palo Alto offices. His practice is largely General Counsel and other senior-level searches for companies, both public and private, around the country. He has special expertise in searches for fast-growth companies and portfolio companies of private equity firms. He can be reached at (713) 425-1623 and rmajor@mlaglobal.com.

*According to the 2013 Texas Lawyer’s annual Corporate Roster, which reports on general counsel pay packages, total compensation for general counsel at 47 Texas companies averaged $2,237,233 in 2013. This figure is down 8.1% from an average of $2,433,585 for general counsel at 50 large Texas companies in 2012. The decline in average compensation followed three consecutive years of increases. All but five of the 47 general counsels on the best-paid chart received total compensation in 2013 in excess of $1 million (including the value of their equity).

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