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<p>Well, I challenge the proposition that they are unprofitable. Let’s just run the numbers! </p>
<p>Assuming an associate billing even a lowly 1,800 hours/year which would be a bare minimum. Let us also assume that the corporate overhead on the $160K/year associate is a full 100% which is certainly on the high side (the average overhead for attorneys is closer to 50% of income) bringing his fully loaded cost to $320,000. In order to break even on the cost of the associate the firm would need to bill out at at least at $175 which is very low for biglaw. According to a Survey by the National Law Journal, the median billing rate is $205 nationally for associates and the range is $175-300. In New York, the median billing rate is is closer to $250 for associates with $300 not uncommon. So the firms are actually making a profit even when paying the mediocre associates the top salaries and bonuses. The more productive associates are even more profitable. </p>
<p>The only situations where a firm would actually “lose money” on an associate would be in the event of over-hiring and not have enough paying clients to spread the billable hours across. This actually did happen with some firms in the past few years, and the immediate response has been to lay off associates or simply defer new hires as happened in the 2008-2010 period. The market response has actually been very rational. </p>
<p>In an industry where quantity of output is the single measure of performance and where quality is essentially irrelevant, the compensation scheme is actually highly rational. There is absolutely no incentive to do a better job or to hire higher performing associates who can complete the job faster: such associates would actually make less money for the firm under the current system. You want drones who can work until exhaustion and generate substantial revenue for the firm at a relatively low cost/hour. The proposition that law firms lose money on associates is just a myth! They are the workers bees that partners need to leverage. An associate who can’t bill the minimum hours is simply cut.</p>