Why the Billable Hour Creates Bad Incentives

The standard model of attorney compensation at big firms is to pay attorneys a fixed salary with an expectation that the attorney will bill at least 2,000 hours a year.  If the attorney does not meet the target, the firm will lose profitability and the attorney might lose job security.  If the attorney meets or exceeds the target, then they might be eligible for a bonus in excess of their salary.  In the past few years, associate salaries and bonuses have been pretty healthy.  

The incentives for attorneys in such a compensation model are perverse.  For example, a client may appreciate that an attorney only spent 10 hours drafting a motion since their bill will be lower than if the attorney spent 30 hours doing the same work.  But that attorney will be at a disadvantage billing only 10 hours since the extra 20 hours will help them meet their billing target.  I’m not saying the attorney has to lie about his time (although it’s no secret there are bad eggs who do this), but he can just work slower or less efficiently.  Who couldn’t rewrite paragraphs over and over again to make them “perfect”?  Heck, the firm is not going to complain about getting an extra 20 hours x $600/hour or $12,000 in revenue either, unless the client makes a fuss!

Or what if the attorney has been slow and there are only two months left in the billing year and they need another 425 hours to hit their target.  If they fall short, the firm might decide not to award them the market bonus of $75k for their class year.  Sure, they will probably scramble to get work, but will they be tempted to add in a few hours here and there and blame their faulty memory?  Or if they truly forgot how many hours they worked last Wednesday, will the accounting be resolved in their favor, or the client’s?

The bottom line is under the existing compensation model, the average associate or attorney is going to try to maximize their compensation since the firm maximizes their domination over said associate.  When the focus is to clock as many billable hours as possible, the interests of the client can fall by the wayside.

Checks and balances really are not put in place on a consistent basis.  I was responsible for reviewing draft bills for certain clients.  I would write off time from bills as appropriate, but I can tell you it is very difficult to audit time entries even for fellow team members. Especially when 15 billers are on the bill. Who knows what level of scrutiny other attorneys apply to their bills, even within the same firm.  Chronic overbillers are rarely punished as time that gets written off is often charged against the partner bringing in the work, not the associate who billed the time, as the assumption is that the time was properly entered and is being cut for budgetary reasons.

Is there a solution to this problem that might be available to someone who isn’t in the typical situation of a big firm lawyer?

 

6 thoughts on “Why the Billable Hour Creates Bad Incentives

  1. In slight defense of the billable hour, most of the problems you identify go away if the lawyer/firm is busy. Sure, I *could* spend 30 hours on this task instead of 10, but if I did, that would just mean 20 fewer hours to spend on the next partner’s assignment. Why would I drag my heels on one assignment (and possibly annoy someone when ends up cutting my hours) when I could spend the same time working on a second assignment and possibly impressing a different partner/client?

    Of course, all that breaks down when there’s not enough work to go around. But in busy times, the system works well.

    • True, when things are busy these problems don’t manifest themselves as much. The current compensation system is almost fatally idealistic as it assumes all lawyers will be busy, when that is rarely the case across all practice groups.

      • Yeah, that’s a good point. And it’s probably gotten worse as law has gotten more specialized. It used to be that you’d be a corporate attorney and would do m&a work during boom times and switch to doing workouts/restructurings during recessions–and stay pretty busy both times. Now you’re either an m&a lawyer, and are slow during recessions or, or you’re a bankruptcy lawyer, and are slow during booms.

  2. Prior to the ABA (I think?) being successfully sued for antitrust violations, lawyers used to charge flat fees for services–even the “big firms.” Lawyers had “price sheets” that did not deviate much from firm-to-firm, at least in the same class of firms. So, e.g., a NY big law firm might charge $10,000 to negotiate a minor acquisition. This was labeled improper price fixing, so law firms switched to the billable hour model.

    Flat fees, or contingent fees in certain cases, or some sort of hybrid, make a lot more sense to me–why incentivize time wasting, exaggeration, or outright lying? But I’m only a biglaw serf, not one of the feudal lords profiting handsomely off of the billable hour model.

    My question is: why do clients allow these firms to bill them by the hour? Outside of “bet the company” litigation or transactions, why not demand freedom from the billable hour? If there’s a feeling by clients that flat fees are “too risky” and that they get a better deal from the billable hour, well, your post illustrates precisely why this is unlikely to happen.

    Going back to the first paragraph of this comment, the “consumer advocacy” that eliminated big law “price fixing” has probably resulted in a lower quality product at a higher cost to consumers.

    • Good points. There is a reason why things are the way they are. I think hybrid contingency is a pretty good motivator, but surprisingly the clients are the ones who resist because they too want certainty in their legal budgets.

  3. Most large law firms represent corporate interests and. The monied. Rarely will you find an individual that can pay $600 per hour for legal representation. As a former big firm associate, you sell your soul for the money. It adds little value to society except to keep wealth and power with the wealthy and powerful. I am happy to have left the big firm harem years ago and applaud you for doing the same.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s