Bookkeepers learn four attorney compensation models: hourly billing tracked through time software, salary-plus-bonus calculated as base pay and performance percentages, performance metrics tied to billable hours and client origination, and equity partnerships with year-end profit splits. The key is verifying every compensation spreadsheet ties to the general ledger and documenting agreements in writing.
Chapters
This week we're going to talk about attorney compensation models, and generally just a few that I see probably the most frequently. And it's a guide for bookkeepers to help them figure out how to navigate the waters. Typically, a conversation with a new client would be talking to them about all these different things, and compensation definitely always comes up. It's a question we ask in the discovery process to understand if they have a compensation or bonus structure in place. How is it calculated? Don't be surprised if they don't say, well, I've got this spreadsheet over here. And then ask them, is the spreadsheet tied back to the numbers on the books? Usually get a little deer in headlights when you ask that question. 99% of the time it doesn't. It's a side spreadsheet that they keep. And you're gonna find when you're in it that there's a lot of things in it that are incorrect. Because the formulas might be wrong and then it doesn't tie back to the books. So then you have a whole big world of hurt. But if it's in the beginning of the year, you can just start fresh and kind of disregard the past 'cause you always wanna tie the numbers to the books and make sure it all ties back and how it's calculated is critical. So attorney compensation models can tend to be complex. So a client can say to you, or a potential client can say to you, Oh, it's really simple. It's really simple model. It's not bad. It's what your typical eat what you kill or your typical profit sharing or your typical enter the name of it. And then you find out when you talk to them, you reach out to them that it's not so typical and that they've taken something that was simple and made it complex by adding if, ins, theirs, or buts into it. So know that the compensation model probably has unique implications that track back to your payroll or budgeting or profitability. And you want to make sure that they have clean records. So if they're, if you're sitting there looking at books that are not clean, how can you tie it back to a compensation model? Know that if the compensation model is something that's done monthly or quarterly, you've got a very short turnaround window for them, because these attorneys are waiting for their bonuses. They get a little testy when it comes down to getting their bonuses in place. So know that if you're working on some project to clean up the books and it's gonna slow down that whole process of compensation, that that's clearly communicated to your client so they can communicate it back to their staff. So in this, I'm gonna go over a few of the models. Basically gonna go through what I see that's normal and give you some of the math around it and how you would calculate it so it's not so hidden in secret. One of the first ones you'll see is the hourly billing model, and that's really where they're tracking billable hours. Pray to God they have some kind of software in place that can produce those numbers for you. So hopefully your Clio or your LeanLaw is gonna give you the hours, the billable hours. 99% of the time, the billable hours are calculated on collected billable hours. So your realization kind of numbers where it's been paid. So you're not, they're not paying out bonuses on billed hours that haven't been paid. It's important if they are doing it that way, you wanna have a conversation with them 'cause then if things are written off or written down, how do you, how does that affecting compensation because you've already paid a bonus out on money that never was collected by the firm. So you want to have that conversation. So use some kind of time tracking software to monitor the hours billed and worked by the attorneys on the client matters and make sure that the attorneys always log their time in accurately and maintain transparency. So you want to ensure that things are properly done, that they're done in such a fashion where you've got this workflow in place that— cannot be manipulated externally so that it can inflate numbers to get a bigger bonus. And then you want to determine the hourly rate. So set the hourly rates based on the attorney's experience, expertise, and the firm's policies, and also use benchmarks to figure out if that's going to align with what they're looking at. And then you want to come up with a billing formula. So a simple one that's often used is multiply the total billable hours by the attorney's hourly rate. So total compensation is going to equal billable hours times the hourly rate. Really simple formula. And then of course you want to make sure that you take into effect any discounts, any write-offs in that final billing. So you wanna make sure that that's factored in because it's all gonna tie back to the books. You might find that there's a salary-based compensation model. So they might have a fixed salary in place where the attorney has agreed upon since the beginning of their employment that they're gonna get X amount of dollars as a salary. It's a lower salary. And then they, you're gonna calculate that to, to pay them. Obviously the salary per period, annual salary divided by how many pay periods there are. Usually twice a month or every other week is what we typically see at law firms, although it can be weekly or monthly based on the firm. And if you're offering any bonuses, determine the criteria around the bonuses. So they may have in fact taken a lower pay, a lower salary, then they've got these bonuses. So they may be both, they may be Based on a performance goal or the firm's profitability overall. So make sure that you understand that, that the incentives are in place. If they're offering the bonuses, this is how it's being done. And then you're going to calculate the bonuses as a percent, as a percentage of the fixed salary or based on a specific achievement of the attorney. Maybe they hit their goal or percentage of their goal or the firm's profitability overall. So look at how that's done. Then you wanna define the performance metrics. So it's important if they're using a performance-based compensation model, define the metrics. Make sure that the law firm has given this to their clients, their attorneys too, that it's very crystal clear how that's done. Define the metrics. Is it billable hours? Is it client origination? Is it revenue generation? Is it the rainmaker that gets compensated more? Understand how that works. And then again, they might have that base salary, hourly wage as a foundation. And then if they exceed, um, You know, if they're exceeding the billable hour targets, then you might have to calculate additional compensation for client origination. They may have a bonus percentage, 10%, and they award the bonuses as a percentage of revenue. I've seen that as well. And then the total compensation formula. So sometimes it's a combination of the base salary with the performance bonuses. So the total compensation equals the base salary plus the additional bonuses, client origination, or billable hours. It's simple. The next one might be an equity partnership model, and I am seeing that more often. It's a profit calculation. Basically, you determine the firm's overall profits at the end of the year, and then the person, if they're an equity partner, they get a percentage of that. And it's sometimes based on seniority or their contributions. Sometimes you'll have a senior attorney, but they don't contribute much to the firm. And that's kind of an all agreed upon process. You want to ask for that. Whatever's in writing so you don't get any he said, she said scenarios where, you know, one equity partner's complaining about how something was calculated. Sometimes it's a straight up partner distribution. Yeah. Distribution. So you have a 50/50 partner, divide it by 50. If you're 60/40, you know, 85/15, that's the percentage that each partner gets. And then also you wanna factor in if they're doing this model, are they wiping out the checkbook at the end of the year? Make sure that that's all determined as well. So if they leave money cash for cash flow for January, you know, you probably already passed that, but just in case, understand how they did it. And sometimes it's based on revenue, retained earnings, what part will be invested, reinvested back in the firm versus distributed to the partners. So attorney compensation models are a foundational aspect of a law firm's financial structure. So you need to know this stuff when you talk to the attorneys, the partners, when you're hired on the get-go, learn, ask the questions. It's important to start to dive in and ask these questions. They're going to understand that you really know your stuff if you do that. And understand the intricacies of these models. Get what they have in writing that they're giving to each other. Get that in writing for your, for your own purposes. And then write it out as you read it, write it out as you see it, and then review it again with the, the, the lead partner to make sure that you've got the clear communication down, you've got accurate calculations, and you're adhering to the firm's policies so that it's very transparent for all parties involved. It's gonna help them. Compli— you know, maintain compliance. So if you're tying it back to the numbers, that's gonna have the compliance piece. It's gonna build trust and really help with long-term profitability of the thing. I hope that's helpful. And until next week, bye now.
