November 28, 2005
Compensation Schemes: Attorney Fees, Consulting Fees, and Hair Braiding
Posted by Christine Hurt

To round out this morning's musings on compensation, I am going to "braid" together thoughts on three types of fees:  attorney fees, merger consulting fees, and hair braiding fees.  Hang with me.

On our recent Disney cruise to the Bahamas, my daughter and I succombed to the lure of hair braiding.  For those of you land lubbers, note that one cannot step off of a cruise ship onto the Bahamas without someone asking you if you want your hair braided.  In Nassau, a public park outside the dock had been turned into a veritable braiding brothel.  Women in matching tunics walk around Nassau, solicit hair braiding work, then take you back to this open-air braiding salon. ( As an aside, I asked my hair braider if they all worked for one person; she replied that they worked for the government.  I do not know if this is true.)  As I was negotiating the price for my daughter's and my braids, the woman would not quote me a full price.  She kept saying, "$2 a braid."  When I repeatedly asked how many braids would be required, this information was not forthcoming.  Finally, I told her that my stingy husband had only given me $70 spending money, so both heads could not be more than $70.  She argued with another woman until finally they both agreed to the two heads = $70.  (I believe there was some discussion between the women of opportunity cost, which seemed to be zero as neither had any other customers.)  Again, hang with me here.

As we were being braided, an unhappy customer was arguing.  She had agreed to the $2/braid deal and had wound up with 45 braids.  So had her two daughters.  She was now being charged roughly $90 times three.  She balked.  Not only was the price too high, but she thought her braids were too small.  She accused her hair braider of unnecessarily adding braids to increase the price!  Interestingly, when our hair was finished, between my daughter and I, we magically had 35 "not small" braids.  (35 x 2 = $70).  So, you can pay by the braid or by the job, but the end result is going to be that the product will be equal to the price paid.

As with attorney fees.  If a client requests a flat fee, then chances are that the firm will put in only as many hours as equals the fee divided by its usual hourly rate.  The risk is that the work will not be what the client envisioned because corners may be cut.  If you pay by the hour (or the braid), then the firm will have an incentive to fill the project with more hours (or more braids).  As it stands, investment banks charge a flat percentage of a merger price.  If, as suggested in the NYT article discussed below, banks went to an hourly fee, the guys with the models will be able to come up with an hourly fee that will approximate the flat fee.  If hair braiders can figure this out, I'm pretty sure that investment bankers can, too.

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