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How much does industry profitability influence in-house compensation?

It seems plausible to me that there is a correlation between average profit margins of industries and average in-house pay (See my posts of March 24, 2005: differences between industries; and April 8, 2007: highly-paid practice areas.). Companies in industries that earn more as a percent of revenue than other industries ought to be able to pay more (See my post of July 14, 2005 on COLA differences within industries.).

Perhaps some industries have a low law metabolism, a slower pace of business and hence legal change. The body of insurance law is worn smoother than that of telecommunications law. The high-growth, exciting industries or companies attract better talent and pay them more. Counter to that speculation, however, is the likelihood that high-growth companies award stock options in place of salaries and bonuses (See my post of April 8, 2007 on highly-paid practice areas.).

Perhaps lawyers who have practiced longer are attracted to certain practice areas, those that take longer to master (See my post of June 12, 2005 on ten years to become expert.), are higher paid, and are somehow more likely to be found in certain industries? Practice specialty is a significant compensation differentiator. For instance, an Altman Weil compensation study found that securities law specialists earned a median salary 21.8 percent higher than the national median, with IP lawyers next.

Perhaps lawyers in law firms who make more in certain practice areas, demand more when they move inside, which drives up the costs of those law departments that need them. The 2007 ALM Research Survey Report on Billing Rates & Practices has data about the billing rates of lawyers in small and mid-sized law firms. IP lawyers had the highest average billing rates, followed by corporate/securities lawyers, tax lawyers, environmental law lawyers, and health law lawyers.

Perhaps size of company accounts for the differences in compensation. We would have to consider the confounding effect of law-department size, since compensation generally rises with the size of the department (See my post of May 24, 2007.). Some consolidated industries have relatively more big players, with large law departments.

I was dissuaded from all this supposition by research described in the McKinsey Quarterly, 2007 No. 4 at 57, “Neither industries nor corporate ownership can explain the lion’s share of the differences in profitability among business units.” It helps to be in a growing industry, “but being good at what you do matters a lot more.” That conclusion suggests that in-house pay correlates more to how good a company is at what it does than to its industry’s profit level.

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