Attorney Compensation Models: A Deep Dive

Welcome to Accountants LawPod, where accounting professionals and law firms converge. Hosted by Lynda Artesani, Sarah Prevost, and Stephen Libhardt.

Welcome back to the podcast, everybody. And Steve, I heard a rumor that it's actually warmer in Colorado than it is in Florida right now.

I was talking to my brother in Florida this weekend and he said, they live up at the villages up north and they said it was 20 degrees or something.

Did you get snow flurries? Because some places got like snow flurries in the air.

Oh.

It doesn't land.

We're supposed to be up in the 60s here today. It's just brown and crispy here.

Brown and crispy. It was 35 degrees when I walked to the gym and it was windy, so it was colder than that. And then all the grass was like, people had their sprinklers had turned on and it was all frozen, all frozen on the grass. And I saw a couple of cars with like frost on them that were out in the driveway. I was like, "Ooh, wow, I don't see that very often." And we have a problem here with frozen iguanas, the green ones that they don't belong in Florida. And apparently they're all like, they freeze and they fall to the ground and they get big. There's some really big ones. So this morning's news, I said to Mike, "Oh my God, turn that off." This lady had the big bin and you can pick 'em up and throw them in the bin. And the state was— Oh my God. The state was taking them back. To take care of them is how they put it. Take care of them. But they're not indigenous to Florida at all. So I think take care of them means they're gone. I think they're getting rid of them. But this one woman pick them up with their bare hands. They're a lizard. And then she had bins, like big bins of them. And she's like, not a big deal. And you could see all the tails hanging out the bin. I'm like, oh, it's so— she had to have like 30, 40. I have a dumb question.

I used to live in Phoenix and my house in Phoenix did not have a furnace because it never got that cold there. I had a wall furnace in the living room. In Florida, Do you have a furnace in your house?

No, we have electric heat.

In the ceiling?

Yeah, I guess that's where, yeah, the ceiling, 'cause it comes out of the ceiling.

Okay, that's how my brother's house was. Everything was up in the ceiling.

And we keep getting messages from Florida Power and Light saying, you know, use your energy wisely, we are preparing. I said, is that, we use air conditioning all year. Is there a difference flipping the heat on? I mean, it's still power, right? I have the solar and the Powerwall, so I wasn't worried if they, you know, had problems, whatever. Whatever. But, and I guess there was some, it was so windy in some areas that it did blow the power out somewhere in the state, but not down here.

Thank God. Wow.

Wow. Wow.

Wow.

It's a lot colder. We're at like half of your temperature. And I think I was only like 20 degrees higher than Rhode Island.

So, so this isn't a beach day then, is it?

No, not a beach day. I feel bad for all the people that are coming down for February 1st thinking they're getting out of the cold and it's actually so cold down here.

So cold.

Yeah.

Yeah. So does that kill your palm trees and things?

It doesn't kill the palm trees, but any flowers. So what they do is, if you were in my neighborhood, you'd see they, they cover them with this kind of a cloth to keep them from getting frozen and frostbitten, and that would kill them. This happens like every 20 years since I've been here. This is like the second time that we've actually had this kind of cold. So kind of strange.

It's strange.

I don't know how to segue that into attorney compensation models, and we're going to do a deep dive on them, but That's the topic.

They can go from frigid to hot.

Yeah, yeah.

There you go. Good one, Sarah.

So, yeah, and it's funny 'cause we've all been doing this for a long time and you do see various models. Sarah and I were just talking about this last week. We're like, we used to see in the, like years ago, we saw more of eat what you kill was real popular, that model. And we're finding now that people are getting, I don't know whether they're just not getting creative. I think what they're doing is they're just staying to something more basic. And less—

Simplified.

Yeah, to track it. We're finding that that's not the most common anymore. And anybody who does do that modifies it some in some way. But what is the one you see the most, Steve, with attorneys?

Well, I was going to say I see the pendulum swinging back to eat what you kill.

Oh, okay.

And it, you know, that requires a lot more laser-focused type accounting. To break all that down and keep track of it. You know, flat fees are still very, very popular, but, you know, again, they've got to be very careful. And we can break all that down, but they've got to be very careful with flat fees that they're pricing it right. So, um, I'm seeing the pendulum coming back more to the eat what you kill, and I think it's because of the economy and the uncertainty of everything right now. A lot of solos are joining firms again, a lot of firms are merging again, a lot of— there's a lot of change going on. Attorneys keep busy in economies like this. They keep much busier than a lot of other industries like construction or something like that. But, um, the eat what you kill seems to be coming up in conversations again.

So, you know, it's based on the revenue of the attorneys, so what revenue they generate.

Yeah, we also have the originating and responsible attorney segment, which is—

That's another way.

—on the type of firm it It has some overlap, but some firms are really doing the originating and responsible and then doing a percentage of overhead versus the actual piecing it all the way down.

And then you know what I see in that? What I see in that too then is they have a rainmaker on staff who goes out and gets all the business and then they get an eat what you kill percentage of the originator.

Interesting.

Oh yeah, there's a lot of components to it.

Yeah. Yeah, it can get complicated really fast. And a lot of times when we do a consultation with an attorney and we're finding out what kind of work they need us to do, we'll ask about the compensation model. So if you're a bookkeeper listening, you ask about what type they use and then they'll say, oh, I just use the basic, you know, eat what you kill model. And then you say, can I see that spreadsheet or however you're calculating it?

Right.

And if you get that, it's eye-opening because a lot of times it does not tie back to the books at all. So where are they getting their numbers from? Or it's not tying to Clio. And then when you look into the, into the actual spreadsheet, you'll see that some of the formulas are wrong or broken. So it needs to be corrected. We have to make corrections on money that was already paid out because it doesn't align with the books and it should align with the books. And that's where our value goes up, right?

Well, or they'll, they'll, they'll launch that program and have it in place and then they'll make a change, but they won't change the spreadsheet.

What about the model of— you kind of reminded me, Lynda, what you were just saying is you're going to get your salary, but it's going to go against your originating or any sort of revenue that's brought in, and it's a deduction. And then the remainder, that is one—

Kind of like a hybrid. It's kind of like a hybrid, right?

Hybrid. Yeah. So you kind of have what I call a true-up, essentially, because you're looking at, okay, you're going to get this base, but you need to generate X revenue to make us whole 4-year salary, and then above that you will get X. And we kind of saw that for a while there in quarterly. It's where they like basically rebalance it.

Yes. And then sometimes you also see the partner share method, and we see this a lot in the, the small boutique size firms where there's maybe a couple of partners and the partners take an equal amount of draws from the firm. And then at the end of the year, they kind of true up the profit on the end of— at the end of the year and kind of divide it out. We see that a lot. It's real simplistic. I think it's one of the easiest ones to do, and it only really works if the partners share the same— like Sarah and I, we share the same work ethic. We're, you know, we're hard workers. We— it doesn't work if one partner's lazy and doesn't do anything. The other partner's grinding it out every weekend. That's not really a fair plan to do your compensation on, for sure.

Well, you set up guaranteed payments, and then you can also have on the equity side, you can have draws, and, you know, because things can come up throughout the year, and so that, that is uneven, but they have at least a guaranteed base salary, um, and then if one performs more than the other, they can do an equity, um, entry or whatever, you know. So there, you know, there's that blended way to look at it too, which I kind of like that model.

Well, it's simple, right? It's real simple.

Yeah, it definitely— it is a lot, um, The other thing Lynda brought up, which we were— this is partly why our discussion came up last week, is the way that we're underutilizing the software. If you're going to have these types of compensation models, make sure that that information is residing on all the keys of information in your practice management correctly. It's always— you could go back and do the work, but it's a little bit harder. So why not have it diligently done correctly so that when the data is pulled and you're validating it back to the accounting, what's been collected, truly collected, not just written off.

That's right.

'Cause that's the other part too, 'cause you have write-offs, discounts, all kinds of stuff that goes on. What is the set amount that's actually collected? And then from there, so it's just a lot more tedious work no matter which way you slice it. It's just making sure that you've got it correct, I feel like, from the beginning and sharing that information with all of us so we know what we're looking for.

Yes. To your point, Sarah, let's say you're using Clio. Clio has some wonderful productivity reports. And, you know, those can be printed out weekly and everybody take a look at them and embrace them and, you know, row with the ship while it's going across the ocean, not when it gets over there.

And you have to make sure that you are looking at how it's set up because just because they say they're using this and it's set up doesn't mean it's set up properly. Like we found with a client that was putting it in the wrong section and it wasn't going to pull the data we needed because they were putting it into the wrong— they were using the wrong field for it. So you really want to make sure that the Clio or whatever practice management tool they're using lines up. We also have the old school one. And I know I remember this, Steve, you probably do too. Sarah might be too young. But years ago, it was really based on seniority. They called it the monarch method. So you— the longer you were there, the more money you made. So you might not even have been— you were the worker bee, worker bee, worker bee, working your tail off. And then when you hit like my age or your age, Steve, all of a sudden, you sit back, you're going to get more money because you put in all this time and effort all these years. And that one seems to be falling way away because the younger generation in their 30s or 40s that are coming out of— it's just starting to really grind it out and work. They don't want to work their tail off and not get anything for it. Yeah, you know, I could see why that one wouldn't work too well. But that's another method that we have seen, but not really that much anymore. And that was standard for the longest time.

That was my question, is which one actually does retention best? Which model of the compensation—

Yes.

—for retention best. And I know that we're in a day and age where you're not staying tenure. That's not the same anymore unless you're named partner and all that stuff and you have equity. But to incentivize people and align with the good work that they're doing. And also, the other thing too is, as you both were talking, was like, what about the practice area? You had someone hired in and you do one practice here and their skill set is lending itself and you're seeing other types of revenue walk in the door, you're underutilizing your software. So I'm not sure what's the best way to go about it, but those are the questions that stir in my mind as we're talking about this. I feel like it, it's important to have in a dialogue about this. I think—

Well, a lot of it does— go ahead.

Go ahead, Steve.

I was gonna say it depends on the size of the firm too, to, you know, Ted. Address what you were just saying, Sarah, you know, a small, you know, 2-partner firm compared to, you know, 10 of them that offer all kinds of different benefits, then you departmentalize more.

Yeah, you kind of work through equity, right? So you might have an equity— equity partnership kind of a model where you determine the profits for the year, and then you also have percentages that each, each partner has. I also think— I think the one that I see as being one of the most One of the most popular, and it seems to work if you have a lot of rainmakers in there, is a performance-based compensation model. So it's a— you get a base comp, you get base pay salary, and then off of that you get performance calculations. And that's where you'll see that we're coming into play. Like every quarter, all the attorneys get their bonus based on what work they brought into the practice, or however you want to determine what that is. And then you do the You know, you do the compensation from there. And I think that's a popular one, depending on the practice area, though. Like you just said, Steve, it does depend because can you imagine like personal injury? Probably wouldn't work. You know, maybe family law would work. I'm trying to think of what practice areas would work like that.

Corporate.

Yeah, corporate, anywhere you're bringing the business in. And you could, you can talk to any like managing partner and you'll say, who is your top dog bringing business in? Or who do you think works the hardest? Who's the Who's the rainmaker? And they'll tell you right off the top of their head, like, who it is. They know who that person is in their firm that you'll see that they definitely will— that's the person they probably couldn't live without. And sometimes that person goes off on their own and leaves, and then the firm's in a whole new place because that person has left the firm. And that makes it a lot harder. I think that, you know, you don't want to really depend on one. A lot of times the rainmaker can actually be the owner. Yeah. So it's a little bit different than that, but—

You know, and understanding when you reach certain dollar levels of revenue, having a really strong firm administrator that can help do all the backend work on tracking a lot of these things with the accounting department or the outsourced accountant on really nailing down everything and keeping it all very precise.

Mm-hmm.

And then monitoring it and sharing it.

Yeah, I'm curious about too is what's sustainable as we're talking about boutique firms to larger firms, right? What makes it evolve and makes it sustainable because what you do is a two-partner firm of a certain size and what you do at a larger scale, if you're growth mode, I mean, that all has to come into play and you have to have all those components, right, that you have to still manage. And so do you build a model? I guess the question is, is do you build a model where you're tracking all these things and then you have fine-tuning moments at certain benchmarks? I think so. Okay.

I think so.

I think too, if you have a firm and you're working with a firm as an accountant, I think setting up some kind of a system, if you're really getting deep into the weeds of compensation with your client, setting up some kind of a system where each attorney sets a goal and then we see if they've met their goal. And, you know, I think that that's kind of incentivizes, you kind of gamify it a little bit. And I think that will maybe bring some some more—

That's true.

Might bring more business in. I don't know. I mean, there's so many ways you could do it, but I think that's one of the things you could add to it. And then you revisit it every quarter. Here's your goal that you set and here's where you were. You can kind of give them a report card, which nobody likes a report card. It's kind of like budgeting.

Well, you know, you've heard me talk about bonuses before. I'm just this proponent of instead of just walking up with an envelope at the end of the year and saying Merry Christmas, to your point, Lynda, really monitor it and lay it out and have a goal and monitor that goal and share that goal and share the results of it. And they know, I mean, wouldn't you as a human working in one of these law firms feel so much better that you, you gave it your, your all, and then you got, you got this bonus or you got this pay raise or this share of the firm or whatever it is because of that? Because not only, to your point, does the the managing partner maybe that you approach know which attorney in their firm is really producing. That person knows that too, and that likes to be recognized for it. They earned it.

And I wonder too, generationally, like, I like to— I just— we were just talking about it— like to compete with my trainer who's half my age, and, you know, she's strong, and I'm like, yeah, my weights are bigger than hers. You know, that, that feeds my ego. But if you think about it, is that going to work? Like, I look at my daughter's generation. Is that going to work in a generation that they're not as motivated as a baby a boomer or a Gen Xer, right? So it's a different mindset.

What works? Yeah. Well, and oddly enough, I was listening to a podcast this morning that talks about what your parents— what worked for your parents in their times will not work for you as this generation. And it had things in there that we are all accustomed to. Your pensions, you're working hard, like things that we heard and we knew. Part of the thing. And one thing that I felt was interesting was looking at especially people that are in positions that are working for these larger firms that offer stock options or startups.

Yeah.

And I think about the law firms and you're a startup and you're going to have growth and how do you intentionally set these things with that growth in mind? But, you know, when a somebody leaves the firm, that deficit of work, it's not like there's someone equivalent with that same skill set and style that walks in the door. And we are seeing a deficit in the attorneys kind of just in hiring in general.

Yeah.

It's all over the board. Skill sets in the specific niches aren't there maybe at that depth. The exhaustion, attorneys are exhausted. There's a lot of mental instability happening, not because of them, but just, just there's a lot of, a lot of headspace that's happening.

And people want more of a quality of life.

Yeah. Yeah.

And then what's going to happen when AI jumps into this in the next 5 years? Where does that all go? I mean, I hear Elon Musk talk about in 5 years where none of us are going to be working. Everything will be like, we'll get a check and everything's going to be like that. I'm like, oh, I don't think it's going to be 5 years, but I mean, will you, if you have no reason to get out of bed in the morning, I need to be motivated to do something. Yeah. I don't think that's going to happen. I mean, he always kind of grabbed the headline. But I think sometimes when you think about how AI is going to work into this, and you wonder how that will be. I mean, I'm sure that's a whole nother level and a whole nother podcast that we could go into. But this is the way the world is going. I mean, we use it constantly all the time. So how will that affect it?

I feel like in the best practices of compensation modeling and how you're looking at it, I mean, it is— sure, we don't know what we don't know when we're first starting out or when we're at this pivotal change moment where you're like, OK, what was working might have worked, but we sense or we feel the change. And what are the markers that we need to be looking at for that change? And aligning— I feel like, Steve, you bring this up— is just aligning compensation in the bonuses to the work product and to the person who's doing the work.

It's a reward.

It's a reward. Yeah.

But then how do you go from one compensation model and then you shut the light off on it and go to another? That's going to be really, I would think, disruptive in the law firm if you do make that decision to change it, especially in a bigger firm where it's one way a whole year and then you decide this isn't working and you change. You know how people love change. I say that tongue in cheek. They don't. So, I mean, Yeah, you have to wonder about that, how that would affect a firm. I don't think we've had that scenario yet, have we, Sarah, with somebody completely—

I don't think it's the complexity. I think the simplification side of this. I think we've seen it in that regard. I feel like we've been a part of that. It is hard to also, under the governing laws of ethics and so forth, is understanding who and can be bonused correctly. So that we haven't even touched on that, but that's a whole piece as well. And it's also this generation, the one that is younger than us. A lot of transparency is needed for them to feel good about. There's a lot more questions. There's a lot more the art of safety. They have it. Yeah. Well, and they're—

Curious.

They're curious. But also, you think about it, you're coming out with a heavier, more expensive college education than prior years, right? You're not in the purchasing market of a home. That whole adage of buying isn't in the same realm. That is hitting you at 40s. So there's a tendency, right? And there's like a whole change of like, we see it all the time. Move around, live everywhere. Sorry, I'm laughing because my dog is snoring like crazy, my little bulldog over here.

It's really hard to think of that within that generation, that their first home will be in their 40s. When I had like mine, and my— I was 28, I was young.

I was around that age too, Lynda. I was like mid-20s when I purchased, like really purchased my own place on my own, separate from previously. But so anyway, so it is a— it's a mindset shift. And how do you positively, to your point, Lynda, make the change and support your growth. But you also, you're running a business. And like Steve said, it's like that balance. You have to appreciate those that are doing great work and find the balance. And it's not easy. It's a tricky road.

It's like so many things in life. There is no plug and play on this. Just like with software, there's no plug and play. You know, you were talking about AI, just a little side note this morning. I don't know how many of you get on nextdoor.com, but I get on there just 'cause I wanna see what's going on in my neighborhood. There was a posting in there this morning. This lady went to a Wendy's in our neighborhood over the weekend and it was an AI order taker on the little microphone thing.

Oh wow. What did it say to her? Did it say, "I know what you want.

You want a hamburger and fries?" No, she was able to talk to it and have a conversation and do her order. But when she came up with the coupon, it just kept saying, "Please place your order. Please place your order." So, —failure. To that point, you know, they're starting at the lower levels of wiping out a lot of people and then work— it's working its way up. But, you know, I've seen— I have seen over the years some really large law firms in our market shut down, just shut down. And, you know, when you— when you try to dig and find out what's going on, what happened, a lot of it has been— the answer has been it's been so expensive. It just reached a crescendo of you know, the, the labor cost was so high. That always comes out, you know. And, and it's like, boom, they're just gone. And to me, it's like, okay, you didn't run your business right. You, you stuck with one thing. And if you did, to your point, Lynda, if you turned off the lights and you changed the program, how did you explain it? And how did you build trust when you did it? It's not plug and play. It takes work.

It does. And when they start out saying, I have— oh, I have the Eat What You Kill model, blah, blah, blah. And then Sarah and I get the spreadsheet. We're like, well, what's this part? And we'll them, what's this piece at the bottom? Oh, well, Mary, she pays for her own different kind of Blue Cross, so we deduct off of that. And then this one buys his own groceries. It's like, wait a minute, you know, I'm being facetious, but we see all these little ifs, ands, or buts, and I'm like, all right, you just made something way more complex. Like, why did you shift and change this here? You know, do it in a different way. Keep it out the compensation segment. But— Yeah. We see it, so it's kind of funny. It's—

Well, and that's where we can really help law firms when we work with them in that we can become their advisor in so many of these things, and especially with compensation and say, here's your labor cost and it includes all of these pieces. And, you know, it's that many cents out of every dollar is going into labor, which is not a bad thing. It's just realistically, this is where you are.

And then sometimes that'll open the door to looking at who's not billing or who hasn't followed up on their billing.

Oh, yes.

That just opens the big door and find out why it's not happening in the firm, which we do see.

Yeah.

You got to set it up right, is I guess what we're saying. You got to set it up where you can measure it in a way.

And you got to stay on top of it. You need some good support to help you stay on top of it.

So I think the 3 of us should get a pay raise today.

I love it.

Sounds good, Steve.

I'll take it.

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That was a good topic, I have to say.

It was, it was.

Hopefully we helped some people out.

I— exactly. And I know it's not something that we're always engaged on, but— it is one that is important to have with us.

Absolutely. Well, thanks, everybody.

Thank you.

See you next week.

Bye-bye.