If you believe in the "curse of knowledge," a phrase apparently invented in a  1989 paper published in The Journal of Political Economy, we may in fact on occasion know a subject too well:  Too well, that is, to be able to think creatively or in an innovative fashion about it.    According to this article in the Sunday NYT business section, it takes thinking unlike that of those trained in the particular discipline at issue to generate innovative approaches.  Andy Grove sums it up nicely, capturing the tyranny of conformity to the common wisdom:  "When everybody knows that something is so, it means that nobody knows nothin'."

Personalizing this phenomenon to our profession, I'll take the liberty of renaming it the "curse of expertise," because, after all, don't we all consider ourselves experts in our chosen domains? (I sometimes presume I'm an expert in the domain of "the economics of law firms," as "Adam Smith, Esq." is notably subtitled, but I try to catch myself before I go too far down that road—and you should call me on it if you think I have.)

The "curse of expertise" can condemn us to recite what we're comfortable with, to feel altogether too smug about our familiarity with the landscape, and to unconsciously disarm our mental defenses against cant, or worse--to arm to the hilt our mental defenses against unconventional thinking.   It can also lead to thinking and behaving only for the benefit of  those presumably already initiated into the particular inner circle of expertise:  The author offers this wonderful example:

"I have a DVD remote control with 52 buttons on it, and every one of them is there because some engineer along the line knew how to use that button and believed I would want to use it, too," Mr. Heath says. "People who design products are experts cursed by their knowledge, and they can’t imagine what it’s like to be as ignorant as the rest of us."

Our DVD remote has 59 buttons; I just counted.

Separately, but also in the Sunday Business section, the always-wonderful Peter Bernstein, an economic historian par excellence, tells an amusing tale on himself dating back 50 years to New Year's Day,  1958, when he was invited to speak at the Harmonie Club here in Manhattan to offer his views on the economic outlook for the coming year.  (If you're not familiar with Bernstein's work, by the way, you're in for a real treat:  His 1998 Against the Gods:  The Remarkable Story of Risk is, alone, enough to cement any one man's reputation as an insightful and gifted raconteur.)

But back in 1958 he utterly botched his forecast by, in his coinage, "postcasting—extrapolating past experience instead of seeking change in future experience."  Considering the bad economic news headlining the end of 1957 (unemployment up by 50%, the stock market down nearly 15%, industrial production down, etc.), he as a child of the Great Depression forecast gloom and doom.

In fact, the country was on the verge of an historic transformation in the dynamism of the economy, as reflected in a sea change in the valuation of the stock market:    By the end of 1958, stocks had risen so much that the dividend yield on common stocks would fall below the yield on long-term Treasuries.  It has, of course, never since reversed that relationship.  Talk about faith in the future....

What did he miss? 

It's very hard for human beings to recognize truly changed environments.  So, today, as we gape slackjawed (yours truly included) at the wreckage of the sub-prime/credit crunch, our surprise at the mess, and the as yet uncharted magnitude of the mess, is directly traceable to our not recognizing, starting 18 months ago or so, that things were changing.  

Inflation, particularly in the bizarrely mis-named and fundamentally conceptually baffling so-called "non-core" components of food and energy, was rising.  Productivity increases were losing momentum.   Housing prices were, lo and behold, not appreciating or even starting to slip.  Mortgage delinquencies were rising.

But, blinded by the strong run of prosperity from 2002 to 2007, we assumed the Fed could do no wrong, that home prices would continue to climb to the sky, that unemployment would remain at historically low levels, that the stock market would continue its snorting bull ascent as far as the eye could see, etc., etc.

Putting these two stories together should inspire you to:

• Every once in awhile, abandon your comfortable byways of thinking.
• Invite some perfect ignoramuses in and try to explain why you're doing what you're doing; let them ask the brilliantly innocent questions children tend to ask.  ("What's a CDO, Daddy?   No, I mean really, what's in there and why would you want to buy or sell one?")
• Be, not too smart for your own good, but too foolish.  For your own good.

As many of you know, back in  November I was in London for a week.  Among other activities—many other activities—I was pleased to be invited to participate in a panel discussion hosted by Guy Beringer of Allen & Overy, who was on the panel, along with his partner Stephen Denyer, Quentin Poole of Wragge & Co., and John Kelly of Bridge Consulting. 

The purpose of the panel, attended by nearly 150 people, was to discuss alternative measures of law firm performance:  Specifically, alternatives to the almighty Profits per Partner.

I was recently asked to convert my presentation to the form of a paper, presumably to be circulated through some appropriate medium along with my fellow panelists' contributions, and it occurred to me you might find it of interest.

If so, here it is.

Cheerio.

Our  text for today, Dear Reader, coming from The American Lawyer, is as follows:

"There's nothing like a fund-raiser at a private school in Manhattan to define your social station. Time was, lawyers were near the top of the heap. Investment bankers and other finance types have long eclipsed them, but the difference used to be one of degree. Then came private equity investors and hedge-funders, and lawyers nose-dived on the socioeconomic ladder. 'Face it, we have no status,' says an Am Law 100 partner of the pecking order at his sons' private school. 'We go to these school functions, and this well-heeled group looks right through you. They won't give you the time of day. You're just one step ahead of the doorman.'"

Now, it may seem crocodile tears to commiserate with someone making "only" somewhere north of $1-million/year and not, say, $2.5-million and up.   And to be sure there is no richer stage for the conspicuous display of excessive wealth than at Manhattan private school auctions.

But if we've learned anything from the past 30 years of psycho-social experiments addressing income inequality, it's that perceived deprivation never has anything to do with absolute deprivation:  It's all relative.  (Similarly, there's remarkable consistency across nearly all income levels when people are asked, "How much more would you have to make to feel better off?"  The answer?  An almost invariant  15—20% more, whether you're making $15,000/year or $750,000/year.)  

Still, the psychology and the economics of feeling under-appreciated are more complex than whether the leading digit on your 7-figure income is a "1" or a "2" or even how many digits your income comprises.  The goal of this column is to explore some of that complexity, and some of the drastically mixed feelings swirling around the whole subject of lawyer compensation.

Associate compensation

Let's begin, as it were, at the beginning, with associate compensation.  On few other subjects has so much maddeningly off-topic ink been spilled.  Let us line up the primary offenders.

"How can a first-year possibly be worth [$125,000/$145,000/$160,000/$180,000]?"

This typically arises from comparing first-year's to other worthy professions and careers and concluding that, for example, since librarians only make $40,000/year and first-year's are not four times more beneficial for the polity than librarians, something is out of whack.  But markets don't work that way; there is no such thing as a market for a hybrid librarian/first-year, just as there is no market for a librarian who bills out their services at $375/hour.   In other words, the "comparing-professions" argument stumbles out of the gate in confusing the presumed social benefits conferred by a slice of the labor market with what society at large ought to be willing to pay those who have chosen a career there.  Cruel, or inevitable, as it may be, markets, again, don't work that way.  The elements that go into the pricing of a first-year are far more complex, and involve at a minimum:

The return (a/k/a profit) the firm hopes to earn on the associate's labor over their tenure at the firm.  This, of course, will often be a negative  number in the case of any individual associate, but had darned well better be a positive number in aggregate (and it will be).

The competitive marketplace for graduates (a) of top law schools (b) at the top of their classes.  Here it's instructive to point out what might sloppily be thought of as a mismatch between supply and demand, as evidenced by the following chart.

This shows the total lawyer headcount of the NLJ 250 over the past 30 years or so (the green line) vs. the number of graduates of US ABA-accredited law schools (the red line) and first-year enrollment in those schools (the blue line).  It's self-evident that firms must be recruiting from more law schools and/or recruiting more deeply from each class of graduates, as the number of NLJ 250 lawyers has gone from about 25,000 in 1980 to over 125,000 today (a 500% increase) while the number JD/LLB's awarded has gone from just under 40,000 to just over 40,000 in the same period, for  perhaps a 15% increase).  The number of graduates in the top quarter of their class from the top ten schools has essentially been static.  

So that indicates a supply/demand "mismatch," right?  No:  Supply and demand always match.  What varies is price.  Next time you see a headline along the lines of "Inadequate Oil Supplies Foreseen," don't believe it.  You may not like the price, but oil will be supplied. 

That the price of first-years, then, has gone up, should surprise no one.

Associates' Compensation is Only Fair Given: (a) That They'd Gone Without a Raise for Awhile; and/or (b) The Burden of Law School Loans

Nonsense, and nonsense.  Reason (a) has been, as they say in the military, "overtaken by events."  It was a "reason" you used to hear only after the famous Gunderson-Dettmer "dot-com bump" of 2000 to $125,000 for first-year's had been in effect for some time.   Raises recently have been coming along at a nice clip, with some event predicting $200,000 is within our sights.  (The story comments on Williams & Connolly's recent raise to $180,000 for first-years in Washington—although W&C studiously avoids paying bonuses, so the comparison is not quite apples-to-apples.  Ward Bower, among others, says that it "indicates to me that top firms in New York are going to turn around and not only match it but beat it.")

Reason (b) demonstrates the sloppiest  kind of economically illiterate wishful thinking.  What it costs to go to law school—while admittedly, on average, probably more than those MBA's at the hedge funds and I-banks had to spend—has precisely  zero to do with one's post-graduation salary.  Whether you think of it as a "sunk cost," an admission ticket, or simply an investment—one whose future returns have yet to be determined, and which may be positive or negative—no one is going to pay you a penny more for an outrageous student loan burden than for a modest or nonexistent one.

Clients Complaining About First-Years' Salaries

We've all heard general counsel and other highly educated people who ought to know better griping about the "insanity" of first-year salaries (actual quote, and I could have used far more trenchant language and kept it real).

 The only intelligent response to this is, "Snap out of it!"  

Indeed, I wish our profession had more law firm leaders sufficiently courageous and plain-spoken to offer precisely that uncompromising rebuttal to what is the height of irrationality.  The economic mistake our good friends and clients are making is to pretend that it should matter to them what the prices are of specific factors of production that go into the end goods and services they buy.   No sensible buyer cares about the cost of each, or any, specific component of what they're contemplating purchasing; they care about value for price.

Here's a  concrete example:  If I'm debating whether to buy a BMW or a Lexus, do I care what the factory-line workers get paid?  For that matter, do I care what each CEO gets paid?  Not unless I'm hyperventilating about some tendentious socioeconomic cause—in which case we can stipulate my purchasing decision will not be made on the merits of value for price.

So why are clients saying these things about 1st-year salaries?   My only hypothesis, since it cannot be rational, is that it's psychological:  It could be a poisonous combination of jealousy and resentment that BigLaw associates do so relatively well so early in their careers, compared to those toiling in the vineyards of corporate legal departments.  But whatever the explanation, it is not our problem and someone should display the common sense and modicum of judgment required to tell them so.

Income not wealth

Rare is the lawyer, partner or associate, who observes that while our profession of late provides extremely handsome incomes, firms provide  no true wealth-creating opportunities compared to investment banks, private equity and hedge funds, or even good old fashioned Fortune 500's extending stock options. 

I have no explanation for why this bedrock fact goes so unremarked.  It could be that all the noise about associate salaries and PPP's drowns out the signal concerning wealth accumulation; it could be that we're all so inured to the current state of affairs that we don't think to comment upon it; or it could even be that the very fact of noting it seems to serve little purpose beyond salting the wound.

Yet senior partners in prominent firms have complained to me, on occasion, that the method by which almost all firms raise capital namely, enforced partner contributions of capital—jocularly referred to by one as "passing the hat among one's friends"—is singularly unsophisticated.   A seminal consequence of that lack of sophistication is that returns on contributed capital are below-market at best and zero at worst, meaning that some consider themselves lucky to get their contributions back intact (and unadjusted for inflation), much less to enjoy a competitive rate of return on equity ownership of a piece of their firm:  "I might as well park $X-hundred thousand or million dollars in a mattress for 25 years, for all the good my capital contribution has done me!" 

Anecdotally (but there are many many comparable anecdotes), consider the case of a fellow I know who just barely failed to make partner at a major New York City firm, only to end up years later as general counsel of a major financial services organization, with a rich stock options buffet from which to dine.  Missing out on partnership may have been the best thing that ever happened to him, financially. 

And  my point with this would be?

I have two, actually, following repetition of the meet and right reminder that there is little call for sympathy for the economic circumstances of almost anyone employed by BigLaw these days.

Firstly, we should not don the defensive cloak quite so hastily when critics attack associate salaries or ever-escalating PPP's.  That is part of the picture, and a very nice part indeed, but only part.  No one who chooses BigLaw as a career for 40 years, under the current model, will retire with accumulated wealth handed to them along the way.  They will have earned whatever they have, paid full-bore ordinary income tax on it, and then and only then been able to save and invest some portion. 

Secondly, we might begin to wonder whether the current model is all it's cracked up to be.   Lloyd Blankfein, CEO of Goldman Sachs, received "the largest payday ever for the head of a Wall Street firm" this year, namely about $69-million in cash, stock, and options awards.  And his base salary?  $600,000, or an amount entitling your firm to the quite distinct back of the pack if that's your PPP figure.  There are more ways, may I suggest, to skin the compensation cat.

On that note I conclude this holiday compensation meditation.

Are we doing what we can and should to reward the genuine achievers in our firm?  Does associate lockstep still make sense?  Did it ever?

Is paying out cash as ordinary income the only model we can conceive of?  How strained are our imaginative faculties?

On the billable hour model, what hope is there—ever—for capital creation and wealth-building?  Common wisdom about the billable hour is to the effect that lawyers and firms should love it because it's a no-lose "cost plus" model.  Is that, in fact, the most damnably short-sighted perspective possible? 

And why, again, are we as a profession so reflexively defensive about our earnings?  I haven't noticed Goldman Sachs, or Mr. Blankfein, in an apologia this week.

Do we, in fact, really know where we stand on all this?

Here I'm referring to the K&L/Gates—Hughes & Luce merger, which by final vote of the two partnerships will go effective January 1st.  (Back in July, merger discussions were revealed.)  Here's coverage in the Dallas Morning News, the Texas Lawyer, The Lawyer, Legal Week, and The  National Law Journal.  For the record, the combination of the 149-lawyer Hughes & Luce with the roughly 1,400 lawyer K&L/Gates will have nearly 1,550 lawyers in 23 offices:  18 across the US plus Beijing, Berlin, Hong Kong, London and Taipei. 

And what is the rationale?

For K&L/Gates, it's to establish a serious presence in Texas (over 200 lawyers in Dallas, Fort Worth, and Austin, as contrasted to just 35 lawyers in Dallas today).  Texas may logically be viewed as the third important center of economic activity in the United States, after New York and California, with a growing number of Fortune 1000 companies headquartered there—and no longer limited to the petroleum or energy industries. 

For Hughes & Luce, it's to gain access to the three-continent platform K&L/Gates brings to the party:  The US, Europe, and China.   Peter Kalis, chairman and global managing partner of K&L, pointedly noted that "Texas is a strategic market that is underserved by firms with credible, [international] platforms," which Edward Coultas, managing partner of  Hughes & Luce, echoed from the other side of the table by observing that "It removes any question of a platform issue, and we really like this firm, the people, the quality of lawyers. It's the expertise we will have at our fingertips."  The "platform issue," indeed!  Isn't that fingering rather precisely the ceiling on Hughes & Luce's growth as a Texas-native firm?

In short, a bilateral win—on paper.

The ever-gnarly issue of cultural  compatibility remains, of course, on which the only sensible observation to be made at this point is that time will tell.

But for what it's worth, speaking as someone rather familiar with the K&L culture, I think the auguries are promising.  Hughes & Luce dates only to  1973 when four lawyers with an average each of just five years of experience broke away from an established Dallas firm to fill what they perceived as a gap in the marketplace:  Focused, responsive, high-quality legal work for the Texas business community, then in a period of particularly rapid growth.    The firm's website speaks unabashedly about their "history  [being] one of innovation," and adds:

"While the coming decade will present significant challenges to the legal profession and to Hughes & Luce, we are poised to accept the challenge.  The firm's history has made dealing with change the norm, not the exception.  The firm remains confident that the combination of talent, energy, seasoned judgment and institutional know-how will continue to produce 'first-ever' results."

If I have read K&L remotely right, this sounds like a terrific natural fit.

And if it turns out not to be?

At least they're doing it for the right reasons.

Today, in a rare departure into citing what not to do, we have as Exhibit A a piece in the current issue of the ABA's Law Practice Magazine, "Essential Attributes of Successful Managing Partners."  And what, pray tell, are those attributes of the successful?

• Visionary
• Trustworthy
• Financially rigorous
• Optimistic
• Team-oriented
• Skilled communicator
• Cheerleader, and
• Mentor

Overall, we are further instructed, "two themes quickly emerged" when considering managing partner candidates:  First, being able to "manage the firm in a fiscally responsible way," and second, "creat[ing] an environment where people thrive and enjoy doing excellent legal work."  If you're at all like me, it's at about this point that you're saying to yourself, "...and Motherhood and apple pie."

In that case, the line forms to the left.

Shall we devote the exceedingly brief span of attention required to expose this type of thinking (and publishing!) as the vacuous nattering it is?

"Fiscally responsible?"  Indeed.  Let's hope that grade school teachers can actually read, themselves, that bricklayers know top from side, and that nurses know male from female.  Talk about table stakes....

And as for "creating the right environment," our ABA-certified author has evidently escaped even the most glancing encounter with the real world.  One may as well instruct a miler to "run faster," a linebacker to "tackle more often," or a CPA to "do the general ledger better."  Saying it produces precisely zero result:  It's all in the details and the nuance.

Of which you will find none from our author.

Am I belaboring this?  Perhaps, but I'd like to think I actually have a moral for you.  There's a lot of advice out there for managing partners, for executive committees, for practice group leaders, and the like.  I know that for all of you in positions such as those  your "firm management" hat feels quite distinct from your "practicing lawyer" hat.  But I urge you, with all the bemused rhetoric I can muster in this piece, not to leave your faculties of critical thinking at the door when you don your "firm management" hat. 

Do think critically; do examine the source; do ask yourself what the author is actually trying to say (assuming they know themselves—an occupational hazard).  Do, in other words, be the same agnostic intellectual sponge absorbing information and points of view that you are whenever you're introduced to a new matter.  And then, and only then, form your own opinions—and be prepared to re-examine them in light of new evidence.

On the other hand, you could have just skipped to our  poor author's "bio" at the bottom of the sorry little ABA LPM piece and there you would learn all  you need to know.  She describes herself as "a leadership and development consultant and coach [who] specializes in helping successful firms leverage their strengths and grow their business." 

Had I only known it were that simple. 

All this time, I may have been missing the main chance here at "Adam Smith, Esq."  Instead of reading critically, thinking analytically, and doing my level best to write cogently, all I may have needed to do was to persuade readers that I wanted to help the successful among you "leverage and grow."

Darn:  Missed that obvious exit ramp.

But don't fear:  We're just heading on down the road.