Calculating Compensation Models for Law Firms

So there's lots of ways attorneys get compensated for the work that they produce when working at a law firm. Most of the times they will get a salary, and then you get involved in some of the compensation plans that are out there. So we're gonna dive in a little bit into the different compensation models, how the process works, and and how sometimes it can be, some of the bonuses can work and some of the calculations for that. So obviously the most generic way of billing at a law firm is billable hours. The attorney clocks in the hours and then they're billed at the rate that they charge for the client. So if, you know, John the attorney charges $250 an hour, but Mary the attorney charges $650 an hour, they can work the same amount of hours. Obviously Mary's gonna pull in more money for the law firm. So you're gonna have to determine what the hourly rate is, track the hours per client, per matter, which is a big part of what we do. And then we do the billing, hopefully using software for this, whether it's Clio, LeanLaw. You wanna make sure you're using software for that. And then also we get to track, 'cause we're tracking as bookkeepers, we wanna track the paid invoices. Obviously AR is really important, accounts receivable. And then a lot of the calculations, especially when it comes to compensation, should always be on paid invoices and not on just invoices, because if they're not paid, the money's never been earned by the firm. So you'll see most attorneys do get paid by salary. That's just common in every law firm. They just get a— the attorney gets hired. There, there was an agreeable salary compensation. You want to get a hold of the employment letter from the attorney and the client to kind of understand what was agreed to, what hours are agreed to, what services they're providing, where. Also, you want to understand what time they have off that's been agreed to in their employment package. So that's important. And then they get paid by salary and you can calculate that out. Use this, use a calculator or use a state salary program. And then, which would be like a payroll program and just go from there. In the case of most attorneys and in most law firms we work with, there might be incentive bonuses, could just be bonuses at the end of the year, Christmas bonus, But there might be also incentive bonuses where, if the attorney outperforms what was expected, they might even be guidelines in that paperwork that you get when the person's first hired about the compensation bonuses. So you really want to take a look at that and, and see if they're performance-based bonuses. Determine the bonus criteria so that you understand what's being tracked, and then calculate them as a percentage of the fixed salary, or based on just the firm's performance. So it, it could be either way that those are calculated. Sometimes you'll see that the attorney will definitely get a performance-based compensation. It's usually a performance based on a certain metric. So you wanna understand exactly what the metric is. Those metrics could be a certain amount of billable hours is expected. And if they go above that, it could be origination fees. So you need to understand what exactly is going on with the employee. Again, you wanna see the employment agreement. With the, with the staff member of the law firm that you're working with so that you understand how this is going to influence their compensation, as well as understanding exactly what's been agreed upon with the attorney and the partners. So especially if they're a staff attorney, you know, you want to understand exactly what their role is. Again, really important to understand that. Again, performance calculation for metrics can be billable hours can be based on the hours of a specific target that they've agreed upon. So you really want to understand that. And then you do the math. It's the compensation equals however, you know, X amount of billable hours minus the target hours, and that's the bonus rate. That's a calculation that you might be looking at. And this is really looking at when we're looking at a different style of the extra money that they're going to get for compensation. If there are origination bonuses, you want to start to track those bonuses from the new business that's brought in. So they, they're the originating attorney, they brought the business into the firm, and that's usually an agreed upon, um, in their contract, the employment contract. And sometimes that's a piece of the revenue that's generated by the attorney that brought the business in. So the rainmaker, so to speak. The total compensation can be based on a salary. Usually there's an agreed base salary And then any additional compensation or bonuses from origination will be added into that. And whatever is agreed upon, whether it's a quarterly bonus, a monthly bonus— we've seen it all. So all different law firms, different, different models. There's also an equity partnership model. We've seen this on some of the firms, more of a new style. You take the total profit of the firm at the end of a fiscal year, and then each partner has a percentage It's kind of a new model that we've seen. It's an old model, new model, but we've seen it where individual attorneys are working kind of by themselves, but everything goes into a common bucket, so to speak. And they look at the profits and divide out by the percentage of each partner that owns the piece of the firm, each equity share of the firm. And that could be based on seniority or how much money they were actually putting in the business in the beginning. Or it also could be based on the rainmaker, the client generation. Another compensation model you might run into is a partner distribution. So that can be based on the partner's percentages, their equity percentage. And typically that's based on the total firm profits and then they divide it out. So if Sarah and I own a business and Sarah's a 60% partner, I'm a 40% partner, at the end of the day we made $100,000 for easy math. 60, you know, the percentage will go to Sarah, 60%, and the 40% would go to me because that's the partnership percentages in there. And sometimes you have to consider retained earnings in distributing the portions of profits. Really wanna talk to a tax professional when you're looking at that kind of computation. So I hope this is helpful. I know the complexity of compensation can be deep and you really need to know the details. Get those details in writing. Get a complete understanding with your attorney or the partner or the main partner of the firm, whoever you're talking to, to understand exactly what's going on with each employee, especially when it comes to compensation. Ask if they have a spreadsheet because they always have a hidden spreadsheet somewhere and make sure you restate it to them so that you both are on the same page and it's a complete understanding. 'Cause once that money's paid out, you have to tie it all back to the book. So I see that a lot of times attorneys will handle it on their own and do this, side spreadsheet, but then it never really calculates or balances back to the profits or the amount of money there or the way they're checking the data. So you want these metrics to be pure, that they come out of the books, reconciled books, so that way you've got correct computations. If you have any questions or comments, feel free to reach out. And until next week, we're going to talk about Eat What You Kill. So stay tuned. Bye. Bye.