Fun with numbers

I’ve decided to save the career life of Adil Haq. I’ve never met him and don’t even know if he is deserving of my largess, but I’m just that kind of guy.

We met Adil in my last post, wherein I discussed his heart-felt article about how he was terminated by a law firm after just one year due to the firm going out of business, and how he was not going to make that mistake again. He concluded that at his next law firm, he will go in with his eyes open. I explained that he is making the same mistake, because he is still planning to work for someone else instead of taking charge of his own destiny.

If he (and you) cannot be persuaded by the common sense arguments against working for someone else, perhaps hard cash will do the job. The following numbers are specific to the legal field, but the concept likely applies to your industry as well.

I don’t know the specific beginning pay rate for Adil’s former firm when he started – I’d never heard of Heller Ehrman before his article – but the going annual rate for first year associates at the biggest firms was about $130,000. To achieve the number of billable hours required at such a firm, our friend Adil had to work 70 hours per week, more or less. (Many associates can’t maintain that pace and start padding their time sheets instead, but Adil would never do that.) Giving Adil a two week vacation, that means he will have worked 3500 hours for the year (50 weeks x 70 hours per week). If your reaction was that I should also deduct for holidays, you don’t understand the large law firm culture. The fact that you only work 50 hours during the week of Thanksgiving only means that you have to work 90 hours the next week. (While working at a big firm as training for my own practice, I took off two weeks for my wedding and honeymoon. The following month a partner came knocking at my office door, concerned because it did not appear that I was on track to make up those “lost” hours. But I digress.)

Thus, Adil’s effective hourly rate for that impressive annual pay is just $37.14.  (And this is BEST case scenario — see footnote below.) If Adil comes to his senses and starts his own firm, he can command a rate of about $250 per hour from his clients – more as he builds experience. If he keeps his overhead low, he can net about $200 per hour of that amount. Working the same number of hours he was working at Heller, he would earn $700,000.

But that is not a realistic number. Just as was the case at Heller, not every hour he works is going to be a billable hour. Indeed, he will likely spend more time on administrative tasks, because now it is going to fall on him to decide what copier to buy. So let’s be very conservative, and say that Adil will only be able to bill 20 hours per week – just four hours a day – with the rest spent looking through office supply catalogs. With that number of billables, Adil is going to net $200,000 working for himself.

But that is not a realistic number. Adil is going to need some time to build a client base. Thanks to the Internet, that can happen very quickly if Adil hires someone who knows a thing or two about search engine optimization. But even while Adil is finding clients, he can do contract work for others. I pay contract attorneys $100 per hour, and my biggest problem is that they are too busy to handle all of the work I have for them. These contract attorneys are turning away work, and can easily bill 40 hours per week if that is their desire. In fact, I have to keep a stable of contract attorneys because at any given time a number of them will be working short term assignments for other firms, such as huge discovery reviews, on which they are billing 40 hours per week or more. But let’s be conservative again and assume that a typical contract attorney can only drum up 30 billable hours per week, with another 10 spent on administrative tasks (billing, continuing education, etc.). That contract attorney will gross $150,000 for the year, more than Adil, and will do so working 2000 hours annually instead of Adil’s 3500 hours.

But that is not a realistic number. Once Adil starts lining up his own clients, he will not be limited to the $100 per hour as a contract attorney, but will have a blend of contract work and $250 per hour work. If he is good, works efficiently and keeps his overhead down (no office art collections for you Adil), he can make more than the $150,000 per year earned by our hypothetical contract attorney. (In reality many contract attorneys don’t earn half that much, but that’s usually because they just don’t want to work that hard.)  When Adil finally builds his client base to the point that he is leveraging himself through the aforesaid contract attorneys, earning $150 per hour or more for every hour they work, then his income will really take off.

On the flip side, if Adil successfully follows the partnership track at a large firm (very few do), ultimately he could end up making more as a partner than he will make as a solo or partner at his own firm. But to get to that point, he will have earned less for close to a decade, while working far longer hours.

I’ve saved Adil Haq, now let’s consider your situation. Your current job may not lend itself as easily to “going out on your own” as does the legal profession, but that just means you either need to be more creative or pick a new profession. When the housing industry went South, everyone started suing one another, with homeowners claiming they had been misled on their loans or that the homes were defective. I know a number of mortgage professionals and contractors that started their own businesses as consultants, appearing as expert witnesses on loan fraud and construction defect cases. If your profession truly has no escape path to self-employment, then it may be time to buy a Subway franchise.

Footnote:  This post is getting way too long, but I’m on a roll.  The few of us who graduate at the top or our class, having been Editor in Chief of the Law Review, blah, blah, blah, actually do get to pick among the firms that are paying the sort of crazy starting salary discussed here.  Although many such firms are now taking a wait and see approach with the economy, as of 2008 starting salaries had hit the $180,000 mark at some firms, with those who care about such things all abuzz about which firm would be the first to pass the $200k mark.  But these firms employ only a tiny fraction of all working attorneys.  The median salary for first year associates is $57,380; $75,434 for all attorneys working at private firms.  So at an effective hourly rate of $37.14, Adil was living high on the hog.  Even assuming a far more reasonable 50-hour work week for an attorney not working at a big firm sweathouse, the median hourly rate calculates to just $30.17 for all attorneys working for someone else; $22.95 for first years.  I make no mention of bonuses, because in my experience that is a wash when comparing compensation.  An attorney that goes out on his or her own can create their own annual bonuses by having a few contingency cases in the mix.