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4 Harv. Negotiation L. Rev. 167
Harvard Negotiation Law Review
Spring 1999
Note
GETTING THE MOST OUT OF MEDIATION: TOWARD A THEORY OF OPTIMAL COMPENSATION FOR
MEDIATORS
Andrew K. Nieblerd1
Copyright (c) 1999 Harvard Negotiation Law Review; Andrew K. Niebler
Introduction
Mediation is designed to ‘encourage parties to resolve disputes without concern for how the legal system would resolve them
if the case went to trial. ‘1 The range of potential solutions in any mediated dispute is limited only by the parties’ imagination
and individual interests.2 Since the solutions are self-determined, they can be non-monetary and tailored directly to the
parties’ situations. The mediator should facilitate ‘problem-solving‘ sessions that identify mutual interests, generate options,
promote bargaining, and encourage ventilation. Indeed, parties often prefer to mediate their disputes because the process is
flexible, informal, and regenerative. It is not simply a drawn out battle to determine which of the parties is right. 3
*168 On the surface, the goals sought in litigation and the goals sought in mediation appear to differ significantly. The
common perception is that the overriding goal in litigation is to win. From this perspective, investing in litigation generates
evidence that can, in turn, be used to prove the truth of the client’s claim to the fact finder. Ideally, the party on the ‘right
side‘ of the law will prevail at trial and, in cases at law, a judge or jury may award monetary damages. Such an extremely
adversarial contest, however, occurs in only the small percentage of cases that actually proceed to trial.
In the vast majority of lawsuits, the parties settle out of court. Indeed, going to trial is frequently viewed as the ‘best
alternative to a negotiated agreement.‘4 During negotiations, litigants may use the expected trial outcome as a benchmark for
evaluating the strength of their cases and for negotiating the amount and the terms of a settlement agreement. Thus, the
negotiations encourage the parties to identify interests and to trade various legal entitlements in order to arrive at a mutually
acceptable outcome. Out-of-court settlements can thereby promote cooperation and self-determined outcomes much like
mediation does.
An important variable in determining the particular contours of any settlement agreement is the attorney’s fee arrangement. 5
The specific terms of a fee arrangement can create different incentives for attorneys, in terms of both the amount and the
timing of a negotiated settlement agreement.6 A great body of literature has analyzed the problem of attorney incentives,
more commonly known as the principal-agent problem.7 The essence of the principal-agent problem is that the interests of
the principal-- the client--are frequently at odds *169 with the interests of the principal’s agent--the lawyer. Much of the
literature on this topic has, therefore, focused on ways in which the client’s and the lawyer’s interests can be better aligned.8
Fee arrangements providing attorneys with increased incentives to act more in the interests of their clients have been widely
analyzed as important means of curbing agency costs.9
Mediation poses a variant of the principal-agent problem. While mediators do not represent parties in a mediation, they do
serve the parties by shaping, guiding, and facilitating the mediation. Indeed, the quality of the mediator can be vital to
arriving at a mutually acceptable, voluntary, self-determined solution to a given dispute. Therefore, a prerequisite to any
successful mediation is that the mediator and the parties not have widely divergent interests.10 As in the lawyer-client
relationship, the mediator’s fee arrangement will be an important factor contributing to either a symetrical or a divergent
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alignment of the mediator’s and parties’ interests. The very different roles of negotiating attorneys and mediators, however,
suggest that there is no reason to believe a priori that fee arrangements that help bring the interests of clients and lawyers into
better alignment will necessarily have the same effect on the interests of parties and mediators.
This Article addresses the question of what fee arrangements tend to support and promote the very unique goals of the
mediation process. Surprisingly little has been written on this topic, especially when compared to the volumes that have been
written on lawyer-client fee arrangements.11 The topic seems timely since mediation, like many alternative dispute resolution
processes, is becoming increasingly expensive. Parties therefore need to have a more sophisticated understanding of how the
mediator’s fee arrangement may hinder them from obtaining the full value of the mediation process. 12
In light of these concerns, this Article will analyze the incentives that different fee arrangements create for both the mediator
and the *170 parties. This Article may, of course, be criticized at the outset for treating all mediations alike regardless of the
underlying substantive issues.13 My aim, however, is not to provide a specific mediator-compensation scheme in every
individual context, but simply to offer a general framework for beginning to analyze mediator compensation. Toward that
end, Part I will identify the three primary compensation-related risks that parties to a mediation may have to bear, and will
develop a model of the parties’ preferred risk profile. Part II will analyze the effectiveness of traditional attorney
compensation methods in achieving a better alignment between the interests of parties and mediators. Part III will propose
and discuss some non-traditional fee arrangements that might facilitate the specific goals of the mediation process. Part IV
will present a brief summary.
I. Understanding the Parties Risk Profile
A. Three Compensation-Related Risks in Mediation
The key to evaluating the incentives that particular compensation arrangements create in the mediation context is
understanding ‘who bears the risks, regarding both fee (i.e., transaction costs) and outcome.‘14 Fee risk is inherently linked to
the duration of the mediation since the passage of time carries an opportunity cost. The parties may be concerned that the
mediation will take longer and cost substantially more than was anticipated, while the mediator may be concerned that she
may not receive adequate compensation for her time if the mediation takes significantly longer than expected. Hereinafter,
this risk will be referred to as ‘fee risk.‘
The parties may, in addition, bear a risk that is completely separate from any fee calculation. That is, the parties may want the
mediation to continue as long as is necessary to sufficiently air each party’s concerns, address each party’s feelings, expose
mutual interests, and arrive at a voluntary, self-determined solution to their dispute. Mediations that are rushed or hurried
may create an inhospitable atmosphere for realizing these process benefits. The mediator’s fee structure can create incentives
that may induce either the *171 mediator or the parties to shorten the mediation and lose a substantial portion of the process
benefits.15 Hereinafter, this risk will be referred to as ‘process risk.‘
Finally, the parties and the mediator may both bear some risk with regard to the terms that are included in any final
settlement agreement. For example, the parties may have decided to mediate their dispute because payment of a monetary
settlement is not suitable to their particular dispute or circumstances. They may be in particular need of the flexibility and
self-determination offered by mediation. The mediator, on the other hand, may have a stake in the outcome, especially in
arranging a monetary payment between the parties. In this way, a self-interested mediator can cause the parties to lose much
of the outcome benefit of mediating their dispute.16 Hereinafter, this risk will be referred to as ‘outcome risk.‘
B. The Parties’ Risk Profile
Each compensation arrangement will offer parties different combinations of risk. Since the focus of this paper is to help
parties to obtain the maximum benefit from the mediation process, it is necessary to develop a model of the parties’ preferred
risk profile.
First, parties to a mediation presumably want to obtain the services of a quality mediator to facilitate more productive
communication between the parties and to guide discussion in such a way as to create opportunities for agreement. At the
same time, however, the parties want to obtain the services of such a mediator at the lowest possible cost. They will also want
to avoid a large fee range or a fee arrangement that might produce uncertain or highly variable fees. 17 Thus, all things being
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equal, they would prefer a lower fee and smaller fee variance, yet they may be willing to pay more or take on some fee risk in
exchange for higher quality services.
Second, parties to a mediation do not want to lose the process benefits of mediation due to a fee structure that creates
incentives for either the mediator or the parties to negotiate a quick settlement.18 The parties, in all likelihood, would prefer
the mediation to last as long as is necessary to achieve the highest satisfaction level that mediation can offer. Thus, the parties
will want a low process risk.
*172 Finally, parties to a mediation do not want the potential range of outcomes to be restricted by virtue of the fact that the
mediator has a stake in the outcome. ‘Client control of content is essential.‘19 In litigation, clients want their attorneys to
share in the outcome risk because any stake in the outcome will provide the attorney with a proportionately greater incentive
to work harder in representing the client’s interests. In mediation, however, the parties want to retain the full range of
flexibility in styling their own, self-determined outcome. The parties must be allowed to succeed or fail on their own terms.
Parties to a mediation, therefore, do not want the mediator to share any of the outcome risk. That is, the parties will prefer to
bear high outcome risk. Indeed, the whole notion of sharing outcome risk with the mediator is offensive to the promise of
self-determination that mediation offers to the parties.
Therefore, parties involved in mediation have a very specific risk profile. All things being equal, they will prefer low fees
with low to moderate fee risk depending upon the quality of the mediator, low process risk, and high outcome risk.
II. Traditional Methods of Compensation in the Mediation Context
‘The market for legal services uses three principal plans of compensation: the hourly fee, the fixed fee, and the contingent
fee.‘20 This section analyzes these compensation plans both in terms of the incentives they create for the mediator and the
parties, and the risks that the parties ultimately bear under the three different approaches.
A. Hourly Fees
1. Fee Risk
Hourly fees place virtually all of the fee risk on the parties. 21 Since the mediator will receive her wage as long as the
mediation is on-going, she bears very little risk that she will not receive compensation commensurate with the effort and time
that she expends. This is particularly true when the mediator’s hourly fee is uniform across all types and stages of mediation.
In fact, uniform hourly compensation may encourage the mediator to adopt a ‘facilitative-broad‘ or more ‘ *173 therapeutic‘
mediation style.22 On the other hand, when a mediator charges hourly fees that vary with either the type or the stage of
mediation, she bears some small amount of fee risk because it is possible that her hourly rate will be less than her marginal
opportunity costs. In such a case the mediator’s cost of proceeding with the mediation outweighs her benefit. A mediator with
a variable hourly rate fee schedule may therefore have enough incentive to bring a mediation-in-progress to a quick end in
order to earn a higher fee by mediating a different dispute. In sum, the parties involved in uniform hourly fee and (to a lesser
extent) variable hourly fee mediation carry the dual burden of a potentially large and highly variable fee.
Parties may also be subject to highly variable mediator’s fees when the nature of their dispute, or their inexperience, makes it
difficult for them to predict the duration of the mediation. Moreover, hourly fees can be deceptive and difficult to interpret
due to the fact that highly skilled mediators who charge more may not take as long mediating the dispute because of their
greater skill, while less skilled mediators charging lower fees may take much longer to complete the mediation. 23 On the
other hand, if the mediator market is not sufficiently competitive to assimilate new information as it becomes available, high
fees may not be indicative of higher quality or greater efficiency. In that case, parties remain subject to self-interested
mediator behavior with respect to the actual duration of any given mediation. In short, parties are generally in a poor position
to judge the quality of the mediator before the mediation.
*174 2. Process Risk
Hourly compensation would seem to offer parties low process risk. 24 Indeed, at the margin, mediators who charge an hourly
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rate may prefer to bolster their compensation by delaying resolution of the dispute. The increased likelihood that mediators
compensated on an hourly basis will opt for ‘facilitative-broad‘ or ‘therapeutic‘ mediation styles may comfort parties who
mediate their disputes to heal their differences by explicitly addressing their underlying feelings and attitudes.25 Hourly
compensation therefore would seem to align the mediator’s and parties’ interests with regard to the duration and process
benefits of the mediation.
Unfortunately, hourly compensation drives a wedge between the parties’ own personal interests in the mediation. Parties, on
the one hand, want the mediation to fully address their underlying feelings and attitudes, but at the same time they have to
pay for every minute that the mediator is employed. The parties are consequently subject to conflicting self-interests.
In theory, rational parties would participate in any given mediation up to the point where the expected marginal benefits from
continuing the mediation decline to a level that is just equal to the expected marginal costs of continuing the mediation. The
expected marginal benefit equals the value that each party assigns to the potential outcomes regarding any remaining
unresolved disputes multiplied by the probability of realizing those different outcomes, minus any potential tradeoff
adjustments with regard to issues upon which agreement has already been reached multiplied by the probability that those
tradeoffs will actually materialize. The expected marginal costs are equal to the expected number of hours required to arrive
at a voluntary, self-determined agreement multiplied by the sum of the mediator’s hourly fee and each party’s hourly
opportunity costs from not allocating their time to its next best alternative use. Thus, there clearly will come a point where
the marginal costs of proceeding with the mediation simply exceed the marginal benefits to be gained, even though some
issues in the parties’ dispute remain unresolved or insufficiently addressed. 26
*175 In practice, it is virtually impossible to know precisely when the marginal benefits of mediation are just equal to the
marginal costs of mediation. It suffices, for the purposes of this Article, however, to understand that hourly compensation
will tend to produce a sub-optimal amount of mediation from the perspective of the parties. That is, in the absence of
transaction costs, the parties would prefer to continue mediating to resolve all of the remaining issues involved in their
particular dispute. The irony is that it is not the mediator’s self-interest, but rather each party’s individual interests that lead to
a situation in which the parties bear at least some process risk.
Example
Assume that a couple is in divorce mediation and they have worked out an agreement in principle on complicated issues
including spousal support, child custody, child support, and the disposition of the house and the car. Early in the mediation
they also identified the following unresolved issues: (1) the right to use the couple’s joint club and pool membership for
which there is a lengthy new member waiting list, (2) custody of the family dog, and (3) the continued full-time employment
of the family’s servant of fifteen years. The couple is evenly splitting the cost of the mediation. 27 The mediator is charging
$150 per hour for her services. For simplicity, assume that each spouse makes identical cost-benefit evaluations.
*176 Expected Marginal Benefits:
Each spouse calculates the expected benefits of continued mediation of remaining open issues. The expected benefit is
calculated by summing across the products arrived at by multiplying the dollar value of each anticipated outcome and the
probability with which that outcome will occur. In this example each spouse calculates expected benefits for the following
three issues:
.3($0)
.4($2000)
.3($4000) = $2000
(1)
Club/Pool:28
.5($0)
.5($10000) = $5000
29
(2)
Family Dog:
2($0)
.2($4000)
.2($8000)
.2($12000)
.2($16000) = $8000
(3)
Family Servant:30
Total Expected Benefits:
$15000
Each spouse also believes that continued mediation may encourage the other spouse to behave strategically by seeking to
reopen negotiations on issues covered in their agreement in principle. They each calculate the potential loses from such
strategic behavior by multiplying the amount at stake times the probability that the other spouse will obtain that amount if
(s)he behaves strategically times the probability that the spouse will actually behave strategically. The calculations for
potentially re-opened issues are as follows:
(-$16000)(. 5)(.7) = -$5600
(1)
Spousal Support:31
(2)
Child Custody:
$0
(3)
Child Support:
(-$16000)(. 5)(.7) = -$5600
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(4)
House/Car:
(-$8000)(. 5)(.7) = -$2800
Total Potential Losses:
$14000
Thus, each spouse calculates the expected marginal benefit from continuing to mediate to be $1000 ($15000- $14000). Each
spouse believes that the three remaining issues are simple enough that they could probably reach a mediated agreement in 2
hours, but that the *177 more likely outcome is that the other spouse will behave strategically and reopen issues included in
the agreement in principle. In that case they each believe that the mediation would take approximately 15 hours. Each spouse
calculates the expected duration of additional mediation as follows: .3(2)
.7(15) = 11.1 hours.
Expected Marginal Costs:
Each spouse pays $75 per hour for mediation and each spouse incurs opportunity costs of $25 per hour while in mediation.
Thus, every hour of mediation costs each spouse $100. The expected marginal cost of the additional mediation to each spouse
is therefore $1110 and the expected marginal benefit is $1000. Since the expected marginal costs exceed the expected
marginal benefits, each spouse could rationally decide that the remaining issues are not so essential to his or her interests as
to justify continuing the mediation. The issues may as a result remain unresolved or may simply be determined by deferring
to the status quo.32
The preceding example offers several insights about mediations in which the parties bear the full fee risk. First, parties that
underestimate either the value of a certain benefit or the probability of realizing that value are more likely to give in to the
other party when they would be better off mediating. Second, parties that overestimate either the value of a certain benefit or
the probability of realizing that value will continue to mediate when they would be better off ending the mediation. Third,
when both parties underestimate the value of a certain benefit and/or the probability of realizing that value, they are more
likely to let issues remain unresolved or to resolve them by deferring to the status quo. Fourth, when both parties
overestimate the value of a certain benefit and/or the probability of realizing that value, issues are more likely to be resolved
through mediation and mediation is more likely to produce a combined negative net return to the parties. Fifth, when one
party pays the mediator’s entire fee, the non-paying party can hold up the paying party for more concessions since the paying
party must weigh the cost of the concessions against the cost of continuing to mediate; that is, the non-paying party
externalizes the cost of the mediation. Sixth, the extent to which hourly fees yield suboptimal amounts of mediation is
dependent in large *178 part upon how the mediation costs are divided among the parties33 and the extent to which the
parties behave strategically.34
3. Outcome Risk
The parties bear the full outcome risk when the mediator is compensated on an hourly basis. Since the mediator will be
compensated whether or not the mediation is successful, the mediator has no stake in the outcome. 35 The full range of
voluntary, self-determined solutions to the dispute are consequently available to the parties on equal terms without the
interjection of any mediator bias. Thus, parties have undistorted access to both monetary and non-monetary solutions. This
situation is preferred by parties in search of a voluntary, self-determined outcome.
B. Contingency Fees
1. Fee Risk
Mediators compensated pursuant to a contingent fee arrangement bear the full fee risk. The mediator cannot be sure in
advance if the mediation will take a very long time, and she cannot be certain that she will receive compensation
commensurate with the effort that she invests in the process. Contingent-fee mediators therefore effectively purchase an
equity interest in the resolution of the dispute.36 The form of the contingency can either be a percentage share of a monetary
payment that occurs as part of the settlement of the dispute, or a fixed fee that is paid out only upon the successful completion
of the mediation.
2. Process Risk
The contingent fee normally furnishes agents with incentives to act more in line with the principal’s interest by encouraging
agents to adopt risk preferences that are similar to those held by the principal. 37 Parties to a mediation would consequently
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seem to bear very little process risk when contingency fee arrangements are utilized. *179 Indeed, unsophisticated parties
might presume that the mediator will continue to mediate as long as the parties are willing participants and an agreement is at
least somewhat likely. The fact is, however, that the mediator will be constrained by the opportunity costs she incurs by
continuing to mediate the dispute.38 Therefore, all things being equal, a mediator receiving a contingency fee will prefer to
minimize her opportunity costs by arranging a settlement sooner rather than later.
In any mediation, the mediator expends time and effort facilitating communication and attempting to arrange a voluntary
agreement. Each marginal unit of effort expended increases the opportunity costs associated with participating in the
mediation. The mediator’s total return on the effort which she invests in the process diminishes the longer the mediation
continues. Contingency fees can encourage shirking as the mediator’s marginal return on effort declines to a level such that
her opportunity costs outweigh her expected gain from mediating the dispute further. Indeed, while contingent fees provide
mediators with incentives to set priorities and to perform their assignments efficiently, this efficiency may compromise the
mediation process.39 Moreover, the mediator’s interest in conducting a less comprehensive mediation will increase as the
mediator’s contingent percentage share or contingent fixed fee declines.
A mediator interested in a shorter mediation may be more inclined toward ‘evaluative-narrow‘ or ‘bargaining‘ mediation
styles.40 These styles, however, may not adequately address the parties’ underlying feelings and attitudes, and may not differ
significantly, either in substance or atmosphere, from settlement negotiations in the litigation context. Parties paying a
mediator pursuant to a contingency fee arrangement may have to bear moderate to high process *180 risk, and the mediation
that does take place may not produce the satisfaction levels that the mediating parties had hoped to achieve.
3. Outcome Risk
‘Fee arrangements. . . affect the analysis of [parties’] interests, the generation of creative options for resolution, and the pace
of the [[mediation]. ‘41 Contingent-fee mediators who will receive a percentage of any settlement payment ‘have a strong
reason to concentrate on dollars and cents: it is difficult to take a percentage of something else (e.g., a third of a house, or a
third of an apology, or a third of a job). ‘42 However, contingent fee mediators who receive a fixed sum in the event an
agreement is reached have no comparable interest in ensuring that there is a monetary component to the settlement. Mediators
receiving a fixed sum, of course, still have a very strong incentive to ensure that an agreement is reached, and to that extent
they may employ a much more aggressive, pushy, or cajoling mediating style.
The parties to a mediation prefer to bear all of the outcome risk. By giving the mediator monetary incentives to produce an
outcome, the parties sacrifice much of the self-determination that is characteristic of mediation. Ultimately, the parties want
the mediator to share their risk preferences with regard to the mediation process, but not with respect to any particular
outcome or agreement.
Contingent fees may also be offensive to the very notion of a third party neutral. Mediators who have a stake in the outcome
will almost certainly encounter situations in which they have conflicts of interest with one or the other party. Such conflicts
pose ethical challenges and may diminish the parties’ level of confidence and trust in the mediator.
C. Fixed Fees
A fixed fee can take one of two forms. On the one hand, it may be a guaranteed amount that the parties will pay to the
mediator irrespective of the outcome of the mediation. On the other hand, it may be a contingency arrangement according to
which the mediator will *181 be paid a sum certain only if a voluntary agreement is reached. Because the risks associated
with the contingency fixed fee in a mediation were discussed supra Part II.B, this section will focus only on the risks posed
by guaranteed fixed fee arrangements.
1. Fee Risk
Mediators paid a fixed fee bear the full fee risk. The mediator cannot be sure in advance if the mediation will take a very long
time, and she cannot be certain that she will receive compensation commensurate with her opportunity costs or the effort that
she invests in the process. The fee risk created by this uncertainty is most appropriately born by the mediator rather than the
parties involved in any particular mediation because the mediator can cost average across all the mediations in which she
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participates. Experienced mediators are also in a better position to evaluate the expected duration of the mediation, and they
can offset the tendency to shirk by raising the mediation fee. A higher fee would in effect include a risk premium to
compensate the fixed fee mediator for the insurance services that she is providing by bearing the full fee risk. Similarly, more
experienced or particularly well qualified mediators may choose to ensure adequate compensation for their quality services
by charging fees that are commensurate with their professional reputations.
2. Process Risk
The process risks of fixed fees are very similar to those described above for contingent fees. ‘Fixed fees may give [mediators]
incentives to minimize their time, rather than provide the best results.‘43 Fixed fee mediations that last longer than expected
can be expensive for the mediator in terms of her opportunity costs, and she may ultimately not be adequately compensated
for the time and effort that she has expended. As suggested above, mediators interested in minimizing the duration of the
mediation may compromise the process benefits of mediating the dispute by selecting ‘evaluative-narrow‘ or ‘bargaining‘
mediation styles.44 In general, however, fixed fee mediators will be somewhat more inclined than contingency fee mediators
to select a facilitative or therapeutic style since they will be paid irrespective of the outcome to the mediation. The enhanced
capacity of the mediator to choose a style that is in better alignment *182 with the interests of the parties is a critical
difference that tends to make fixed fee compensation preferable to contingent fee compensation.
Moreover, the economic realities of fixed fees make them a particularly well-suited vehicle by which to compensate
mediators. Specifically, ‘[f]ixed fees require effort by [parties] to specify in advance, often in some detail, the nature of the
work to be performed.‘45 In litigation, where the scope of the problem may not become clear until after lengthy and
expensive discovery, fixed fees may be particularly inappropriate. But in mediation, a critical part of the process is
‘information gathering‘ and ‘problem identification‘ in order to ‘allow a full exchange between the parties of the facts as they
see them, the history of the dispute, and their opinions and emotions.‘46 The scope of the dispute is commonly identified
early on in the mediating process as the parties are encouraged to explain and discuss their respective interests. While low
fixed fees may compromise some of the process benefits of mediation and cause the parties to bear a higher level of process
risk than they would prefer, the fixed-fee mediator’s interest in identifying the scope of the problem dovetails well with the
interests of the parties in expressing their emotions and feelings during the initial stages of a mediation. 47
3. Outcome Risk
The parties bear the full outcome risk when the mediator receives a fixed sum for her services. Since the mediator will be
compensated whether or not the mediation achieves a satisfactory outcome, the mediator has no stake in the outcome. 48 The
full range of voluntary, self-determined solutions to the dispute are consequently available to the parties without distortion
caused by the interjection of mediator bias favoring monetary payments. Thus, parties may arrange both monetary or
non-monetary solutions as they deem appropriate.
*183 D. Conclusion
The preceding analysis has demonstrated that the traditional attorney compensation methods clearly provide parties with very
different risk profiles in the mediation context. Figure 1 below summarizes the preceding risk analysis from the parties’
perspectives. Although the assigned risk levels follow directly from the analysis, in some instances footnotes are included to
provide additional explanations.
Figure 1: Risk from the Perspective of Mediating Parties495051525354
TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
*184 The conclusion that fixed fees enable parties to maximize the benefits of the mediation process comports with common
sense. Parties who have agreed to pay a fixed fee understand the fee to be a sunk, or lost, cost. Once they have agreed to pay
the fee, they rationally devote their full attention and energy to healing their differences with the other party to the dispute. At
the same time, the mediator has no stake in the outcome and can ensure that the healing process works to the maximum
advantage of the parties, albeit within the economic constraints imposed by the mediator’s opportunity costs. Moreover, the
mediator is a better insurer of fee risk because she can cost average across other mediations or other lines of work. Fixed fees
are therefore the preferred compensation plan from the parties’ perspective because the fixed fee approach is more successful
at assigning each of the three risks to those mediation participants that either can or want to bear those risks.
This analysis also furnishes a better understanding of precisely why contingency fee arrangements should be avoided in the
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mediation context. The traditional explanation in support of this view is that contingent fees create conflicts of interest for the
mediator and distort the notion of a third party neutral. While this explanation is certainly accurate, contingency fee
arrangements also tend to distort the very process that the parties are presumably seeking out by choosing to mediate their
dispute.
The traditional method of mediator compensation--the hourly fee--is a close second to the fixed fee. Under some
circumstances it may function as well as a fixed fee, while under other circumstances it may fall substantially short. Each
mediation presents a different set of facts that can change the incentives the parties face and the difficulties they must
confront in reconciling the schism in their individual self-interest that hourly compensation raises. Indeed, perhaps the most
troubling aspect of the hourly fee is that it has the potential to turn the parties against each other as they attempt to engage in
a process designed to help them heal their differences with the other parties to a dispute.
*185 III. Mixed and Multi-Stage Fees: Facilitating the Goals of Mediation
Part II supra demonstrated that fixed fees are optimal since they enable mediating parties to maximize their use of the
mediation process, and that hourly fees, under some circumstances, are a close second choice. This Part will discuss two
ways in which those two fee arrangements might be combined to the mutual advantage of both the parties and the mediator.
A. Mixed Fees
The premise underlying the idea of mixed fees is that the parties are able to separate critical and important issues from
tangential or side issues.55 Indeed, in most cases, this is central to the early stages of the mediation. The mixed fee concept
would then apply fixed fees to the critical and important issues and hourly fees to the tangential issues.
The idea is that the parties are most interested in obtaining the process benefits for the critical and important issues, and that
the parties have a comparatively smaller need to heal their differences with respect to the side issues. 56 In this way, the
parties obtain the process benefits where they need it most, while the mediator does not have to absorb the entire fee risk and
will have commensurately less incentive to minimize the time she devotes to the mediation.
There are two problems with the mixed fee approach. First, it will not be effective when the parties cannot agree as to which
issues are critical to their dispute and which issues carry less importance. Second, it tends to sideline tangential issues since
the parties’ valuations of the benefits to be obtained, the likelihood of obtaining those benefits, and the risk of strategic
behavior on the part of the other party may rationally lead each party to stop mediating the tangential issues altogether. The
parties would then consume a suboptimal amount of mediation with regard to those side issues. On the other hand, in
situations where the application of hourly fees will not substantially reduce the amount of mediation consumed with respect
to *186 the side issues, the mixed fee approach carries the potential to make each of the parties and the mediator better off.
By way of example, assume that a person has purchased a new condominium which is in the early phase of construction. At
the time of the purchase the builder advertised 9 foot high ceilings and 6 foot high windows throughout the home, a security
guard to patrol the condominium community, and an additional on-site centrally-located storage facility for each of the
condominiums. The homeowner has recently discovered that, in fact, the unit he purchased will have 8 foot ceilings and 5
foot windows and that there will be no security guard or storage. The condominium is located down the street from a police
station in a safe part of town and the particular unit in question has adequate, if not abundant, storage. On these facts, the
homeowner in a mediation might decide that the loss of the 9 foot ceilings and 6 foot windows is the most critical issue since
it most directly affects the value of the condominium and the “feel” of the living space. The loss of the security guard and
storage space are certainly annoying and worthy of discussion in mediation, but given the safe location of the condominium
community and the otherwise adequate storage in the unit the homeowner might conclude that these are side issues.
Accordingly, after analyzing the situation the homeowner (and the builder) would probably agree that obtaining
compensation for the altered ceiling and window heights should be the primary focus of the mediation. Such compensation
could be monetary, but it might also take a variety of other forms including structural changes to the condominium unit such
as creating a pantry in the kitchen, moving the washer/dryer to a more desirable location, or installing a set of French doors at
no additional cost to the homeowner. To the extent the preferred compensation is non-monetary, the builder and the
homeowner might derive greater benefit from the mediation process at a lower cost by applying a fixed fee arrangement to
their dispute over the ceiling and window heights and by paying the mediator an hourly fee for the time spent, if any,
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mediating the dispute over the security guard and storage space.
B. Multi-Stage Fees
Another interesting alternative involves the utilization of different fee arrangements at different stages of the mediation to
keep down mediation costs and to maximize the value of the mediation. 57 The general premise here is to apply fixed fees to
those stages of the *187 mediation where the duration and cost are most uncertain and to apply hourly fees after the scope of
the dispute is better understood and the durational uncertainty has been reduced. 58 Thus, those stages of mediation where the
expression of the parties’ opinions, feelings, emotions, and attitudes is most important might be billed using a fixed fee
arrangement to ensure a complete and thorough airing of the parties’ differences. Hourly fees might be applied, however, to
those later stages where the parties rationally think about the problem and reason through the various alternative solutions to
arrive at a mutually acceptable resolution. This fee dichotomy would be most effectively applied to those situations where the
early stage helped the mediator to understand better the scope of the parties’ differences and thereby enable her to reduce the
parties’ fees and process risks by more accurately estimating the time that will be required to mediate the dispute. In such a
mediation, the parties might want to begin by paying hourly for the introductory remarks by the mediator. 59 Fixed fees,
however, would be applied to the parties’ statements of the problem, information gathering, and problem identification. The
problem-solving and writing of the agreement stages might then revert back to an hourly fee schedule.
Of course, the problem with such an approach is that the mediation may not, in practice, divide so simply and cleanly into
identifiable stages. But where such divisions are possible, a multi-stage approach again enables the parties to obtain the
process benefits, but does not require the mediator to shoulder the entire fee risk burden. Parties that are willing to share
some fee risk can expect the mediator to have less incentive to minimize the duration of the mediation. Longer mediations
may help the parties to realize more of the process benefits that mediation has to offer.
IV. Conclusion
The healing process of mediating disputes has value in and of itself. Indeed, it is this value that many parties hope to realize
when they select mediation as their dispute resolution mechanism. The mediator’s fee structure, however, can pose an
obstacle to the parties as they attempt to tap into that value. Since the parties’ primary goal is to secure the benefits of the
mediation process, the parties *188 may face substantial process risk. Such risk can arise because the mediator has interests
that conflict with the interests of the parties, or because the parties have conflicting interests. Ultimately, the parties will only
be able to secure a greater share of the value of mediation if the mediator’s fee structure helps achieve a better alignment of
the mediator’s interest and the interests of the parties, and avoids the creation of a schism in each party’s individual
self-interest.
Footnotes
d1
A.B., June 1989, Princeton University; J.D., May 1998, Georgetown University Law Center. Mr. Niebler is currently an associate
with Cleary, Gottlieb, Steen & Hamilton (CGS&H) in Washington, D.C. The opinions expressed herein are personal to the author
and do not necessarily reflect the opinion of CGS&H, any member thereof, or any of the firm’s clients. Mr. Niebler would like to
thank Carrie Menkel-Meadow and Beth Pincus for their comments, guidance, and support, and Brent Sterling for production
assistance.
1
John S. Murray et al., Processes of Dispute Resolution: The Role of Lawyers 298 (2d ed. 1996).
2
Of course, any final agreement between the parties should be within the law in terms of the legal enforceability of the agreement.
3
See Murray et al., supra note 1, at 303 (‘Mediation is not a search for the truth.‘); see also Stuart S. Nagel, Broadening the
Applicability of Multi-Criteria Dispute Resolution, in Systematic Analysis in Dispute Resolution 3, 7 (Stuart S. Nagel et al. eds.,
1991) (explaining that mediators have the advantage of ‘informality and quietness, but not the disadvantage of having to think in
terms of a right-wrong dichotomy. The mediator can try to find right on both sides and work out a settlement that can (if done
well) be better than the best expectations of either side.‘). See generally Allyson Weir, Mediation: A Consumer’s Guide 2-4
(1995) (explaining that the advantages of mediation are that it focuses on needs and interests, helps relationships continue, deals
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with feelings, provides greater satisfaction, encourages informality, saves time, lowers costs, and protects privacy).
4
Roger Fisher et al., Getting to Yes: Negotiating Agreement Without Giving In 98 (2d ed. 1991); see also Lucian A. Bebchuk &
Andrew T. Guzman, How Would You Like to Pay for That?: The Strategic Effects of Fee Arrangements on Settlement Terms, 1
Harv. Negotiation L. Rev. 53, 54 (1996).
5
See Bebchuk & Guzman, supra note 4, at 63 (‘[F]ee arrangements... have a strategic effect on settlement negotiations. They affect
the bargaining position of the party employing them and, therefore, the terms of settlement. ‘); see also Murray et al., supra note 1,
at 211 (‘Legal fees can also have a significant impact on the lawyer’s choice of negotiating strategy and the level of his interest in
negotiating.... Fee arrangements also affect the analysis of client interests, the generation of creative options for resolution, and
the pace of the negotiation.‘); see also Herbert M. Kritzer, Let’s Make a Deal: Understanding the Negotiation Process in Ordinary
Litigation 21-24, 45, 100-05 (1991) [hereinafter Kritzer, Let’s Make a Deal].
6
See Geoffrey P. Miller, Some Agency Problems in Settlement, 16 J. Legal Stud. 189, 200-03 (1987); see also Robert E. Litan &
Steven C. Salop, Reforming the Lawyer-Client Relationship Through Alternative Billing Methods, 77 Judicature 191, 192, 194,
196 (1994).
7
See, e.g., Miller, supra note 6, at 195 & nn.18, 19, 22, 23.
8
See id.
9
See id.
10
See Robert A. Baruch Bush, The Dilemmas of Mediation Practice: A Study of Ethical Dilemmas and Policy Implications 25
(1992) (explaining that practicing mediators find that their own interests may conflict with the interests of the parties, which
include situations in which mediators feel pressure to not spend so much time on a single case).
11
See supra note 4.
12
Cf. Bebchuk & Guzman, supra note 4, at 53-54 (explaining that fee arrangements may prevent parties from maximizing the
potential value of their lawsuits when negotiating out-of-court settlements).
13
See Nagel, supra note 3, at 11-20 (discussing the differences between mediation in family disputes, labor-management disputes,
merchant-consumer disputes, neighborhood disputes, disputes between a government agency and a private firm, disputes between
business firms, disputes between government agencies, international disputes, litigation disputes, and disputes between liberals
and conservatives over public policy).
14
Herbert M. Kritzer, Lawyers’ Fees and the Holy Grail: Where Should Clients Search for Value?, 77 Judicature 187, 190 (1994)
[hereinafter Kritzer, Clients Search for Value].
15
See id.
16
See id.
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17
Mediators are better fee risk bearers than the individual parties because mediators can cost average across their entire client base.
Kritzer, Clients Search for Value, supra note 14, at 190.
18
See supra notes 10 & 12 and accompanying text.
19
John M. Haynes, Mediation and Therapy: An Alternative View, 10 Mediation Q. 21, 22-30 (1992).
20
Kirchoff v. Flynn, 786 F.2d 320, 324 (7th Cir. 1986) (Easterbrook, J.).
21
See Kritzer, Clients Search for Value, supra note 14, at 190.
22
Leonard L. Riskin, Mediator Orientations, Strategies and Techniques, 12 Alternatives 111, 111-12 (1994); See generally Susan S.
Silbey & Sally E. Merry, Mediator Settlement Strategies, 8 Law & Pol’y 7, 12-20 (1986):
[T]he therapeutic style of mediation is a form of communication in which the parties are encouraged to engage in full expression
of their feelings and attitudes. Here, mediators claim authority based on expertise in managing personal relationships and describe
the purpose of mediation as an effort to help people reach mutual understanding through collective agreements.... [T] he
therapeutic style emphasizes emotional concerns, faulting the legal system for worsening personal relationships. In this mode,
agreement writing becomes a collective activity, with mediators generally maximizing direct contact between the parties wherever
it may lead.... They rely more heavily upon expanding the discussion, exploring past relations, and going into issues not raised by
the immediate situation, complaint, or charge.... In addition, the therapeutic mode tends to emphasize the mutuality, reciprocity,
and self-enforcement of the agreement in contrast to court or program monitoring.
23
If these conditions truly hold, then the range of the mediator’s potential fees would actually be reduced. That is, the higher fees
would be offset by the reduced expenditure of time or the lower fees would be augmented by the increased expenditure of time.
24
Hourly compensation that varies with either the type of the stage of mediation subjects parties to somewhat higher process risk
than uniform hourly compensation because the variable hourly compensation may give the mediator marginally increased
incentive to shorten the mediation.
25
Riskin, supra note 22; see generally Silbey & Merry, supra note 22.
26
See Bebchuk & Guzman, supra note 4, at 58-60.
27
See generally Stephen B. Goldberg, Meditations of a Mediator, in Containing Legal Costs 63, 64 (Erika S. Fine ed. 1988):
Typically the allocation [of fees is] on an equal basis.... In... cases in which all the mediator’s fees were paid by one party [I was
not] aware of any lack of trust in the mediator on the part of the non-paying party. [The non-paying party usually has] participated
in the selection of the mediator to the same extent as... the paying party, and [has] appeared not to be concerned that the mediator
would act prejudicially toward it. Trust, then, rather than payment would appear to be the critical issue. If both parties trust the
mediator, mediation can be successful even if one party is paying the mediator’s entire compensation. If, however, one party does
not trust the mediator, the success of mediation is doubtful, even if the costs of mediation are shared.
The fact that one party is paying the mediator’s entire compensation may be significant, however, for a quite different reason. A
failure by one party to pay an equal share of the costs of mediation for reasons other than lack of funds may indicate that that
party is not as serious about mediation as are the other parties. If that is true... the prospects of success in mediation are slim.
Thus, if a party which could afford to share the costs of mediation is unwilling to do so, the other parties should be wary of
agreeing to mediation.
28
The three options, respectively, are: (1) no membership; (2) one person membership; and (3) two person membership.
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29
The two options are getting the dog or not getting the dog.
30
These options include one person or the other obtaining the full time employment of the servant or daily, weekly, or monthly
service.
31
For the purposes of this example, assume a scenario in which the spouse with greater earning potential stays out of the work force
for a year to raise the child. At the end of the year, that spouse returns to the workforce. The mediated agreement calls for that
spouse to receive spousal and child support payments while she is out of the workforce and to make spousal and child support
payments for a couple of years after she returns to the workforce. The present value of the amounts to be received and the
amounts to be paid each equal $16000.
32
In all likelihood the amounts of spousal support and child support would be much larger than those included in this example. The
amounts were deliberately kept low for purposes of discussion. Higher amounts would have caused the costs of strategic behavior
on the part of the other spouse to dominate such that each spouse would have decided that there was a net negative return to
mediating the remaining issues even before considering the costs associated with the mediator’s fee.
33
A party responsible for the entire mediator’s fee in my example would incur costs of $1942.50 instead of $1110. All things being
equal, higher mediation costs increase the likelihood that the paying party will opt to discontinue the mediation because it is
cheaper to simply accede to the demands of the non-paying party.
34
Clearly, if strategic behavior were removed from the above example, the expected benefit from continuing the mediation would
rise to $14000.
35
The mediator, of course, has a reputation interest. Presumably the mediator may not be thought of as highly if he is incapable of
bringing the disputing parties to a voluntary, final agreement that settles their dispute in a reasonable amount of time.
36
See Miller, supra note 6, at 189.
37
See Murray et al., supra note 1, at 217.
38
See Bebchuk & Guzman, supra note 4, at 56.
39
Cf. Litan & Salop, supra note 6, at 194 (discussing mediator incentives in a fixed fee arrangement).
40
See Riskin, supra note 22; see generally Silbey & Merry, supra note 22:
In the bargaining mode, mediators claim authority as professionals with expertise in process, law, and the court system.... The
purpose of mediation is to reach settlement. The bargaining style tends toward more structured process, and toward more overt
control of the proceedings. In the bargaining style, mediators use more private caucuses with disputants, direct discussion more,
and encourage less direct disputant communication than in the therapeutic style. Moreover, in the bargaining style the mediators
tend to write agreements without the parties present, summarizing and synthesizing what they have heard from the parties. The
job of the mediator is to look for bottom lines, to narrow the issues, to promote exchanges, and to sidestep intractable differences
of interest.
41
Murray et al., supra note 1, at 211.
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42
Kritzer, Let’s Make a Deal, supra note 5, at 45 (‘Seventy-seven percent of... contingent-fee lawyers report that their demands [are]
entirely monetary; this compares with entirely monetary demands and/or offers by 51 percent of hourly fee lawyers and 44
percent of lawyers retained on some basis other than hourly or contingent fees.... Clearly, having a stake in the outcome has some
impact on the nature of the outcome that is sought.‘).
43
Litan & Salop, supra note 6, at 194.
44
See Riskin, supra note 22; see generally Silbey & Merry, supra note 22; see supra text accompanying note 40.
45
Litan & Salop, supra note 6, at 194.
46
Murray et al., supra note 1, at 302.
47
Mediators compensated pursuant to a percentage-share contingency fee arrangement may also have an interest in obtaining a
better understanding of the scope of the problem in the early stages of mediation. However, since such mediators are strongly
biased in favor of arranging monetary-based agreements, the range of issues that the mediator will deem relevant or within the
scope of the dispute is likely to be much narrower.
48
See supra note 37 and accompanying text.
49
This range was selected because the precise level of process risk depends upon the hourly rate, the manner in which the
mediator’s fee is divided among the parties, and the absence or presence of strategic behavior by the parties. It is important to note
that the process risk that the parties bear stems from the schism in their own individual self-interest that the hourly compensation
plan creates. In other words, the parties themselves may choose not to invest the necessary time in the mediation process in order
to bring the mediation to a close.
50
The precise level of process risk depends, in this case, upon the specific level of the contingent fee. Lower contingent fees result
in higher levels of process risk.
51
The contingent nature of the mediator’s compensation, coupled with the fixed fee, furnish the mediator with very strong
incentives to minimize the time she expends on the mediation. However, the fixed fee also encourages the mediator to engage in
information gathering and problem identification in order to obtain an early understanding of the scope of the problem. How these
offsetting factors will balance out is difficult to know in the abstract. The contingent nature of the mediator’s payment also affects
her choice of style. Mediators who are paid only if a resolution is achieved are more likely to be active participants and are less
likely to adopt facilitative styles.
52
The precise level of risk here is a function of the particular amount that the mediator is paid and the tradeoff. See supra note 34. It
is important to understand that the process risk here stems from conflicts between the mediator’s self-interest and the interests of
the parties.
53
The precise level of risk here depends upon whether the mediator perceives a monetary agreement as the only goal or as one term
of a comprehensive agreement that may include several non-monetary terms as well.
54
The fixed fee aspect here would normally produce a high level of outcome risk; for example, the parties would bear the risk as to
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both the uncertainty of whether an agreement would be reached and the uncertainty as to the particular terms of the agreement.
However, the contingent nature of the fee can make a mediator adopt a much more aggressive and cajoling approach, potentially
pressuring the parties to include terms that they may have preferred not to include. The mediator’s interest in the inclusion of
some terms for the purpose of reaching a quick agreement substantially reduces the parties ability to self-determine the outcome.
Thus, on balance these risks seem to offset each other, producing a medium rating.
55
See Murray et al., supra note 1, at 302 (‘It may not be useful to pursue all issues. The mediator should seek to focus on issues that
the parties indicate a sustained commitment to pursuing.‘).
56
The idea here is to focus on the value-added provided by the mediation process. The mediation process should be made fully
available to the parties where there is high value-added, while it can be made less fully available on issues of lesser concern. See
generally, Litan & Salop, supra note 6, at 194.
57
See Murray et al., supra note 1, at 301.
58
See Litan & Salop, supra note 6, at 196 (explaining that risk-averse law firms applying multi-stage billing should bill hourly for
initial assignments where the scope of the assignment is not known and should switch to fixed fee arrangements after the
uncertainty associated with the project has been narrowed).
59
See Murray et al., supra note 1, at 301-02.
End of Document
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