Salary Caps and Retained Earnings for Law Firms

The other day, I was sitting with Phil Brown, of the Law Society of Upper Canada, trying to solve the world’s problems – as we are wont to do from time to time.

I ventured that one of the constraints to access to justice is a lawyer’s overhead. And a large part of that overhead in large- and medium-sized firms, is lawyer salary.

Then I thought, how crazy is it that we live in a world where lawyers can’t survive on a salary of $250,000.00 per year – keeping in mind that this amount is about 5 times what the average Canadian takes home in a year.

Now there are many solo practitioners that will stand up and say they wished they made $250,000.00 per year – true enough, but I thought I would start with the mid- and large-sized firms.

Imagine if you could build a mid-size or even a large-size firm where there was a hard cap on lawyer salaries (and I mean every single lawyer in the firm, without exception); a firm where lawyers were told walking in the door that they would never make more than $250,000.00 in salary per year. These lawyers could however, make a bonus based on (a) the firm meeting its annual goals and (b) the lawyer meeting her annual goals – but no guarantees.

How would that change the dynamics of the firm? Now, the only people working there would be those who are driven by good, interesting work – not money. These people would work together to meet the firm’s goals so that all could receive a bonus. And, as an aside, why would you want lawyers in your firm who are only loyal to money?

Does the growing glut of lawyers in Ontario allow firms to restructure their compensation models in such a fashion?

How would that change the pricing of legal work?

In theory, the firm would use its retained earnings (monies left over after payment of salaries and other expenses) to invest in innovations that re-invent how services are delivered (taking off the pressure lawyers have to chase billable hours), which in turn would reduce prices – or the firm would invest in legal services that can be done without lawyers, thereby creating an additional income stream.

How many students would still go to law school if they knew their salaries would cap out at $250,000.00 plus bonus?

Plenty I’ll bet.

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Comments

  1. Mitch I was curious about your reference to “retained earnings”. Of course as things currently stand (ie lawyers cannot practice in a corporate structure) there really are not retained earnings as such. Earnings are taxed and monies that remain are effectively capital. Of course if a corporate structure were possible what you propose is much more plausible.

  2. “How many students would still go to law school if they knew their salaries would cap out at $250,000.00 plus bonus?” I agree with your answer of plenty. Especially if there’s no cap on the bonus. But at first glance it would be good PR.

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