Attorney Compensation Models

Hi there, Linda Artesani, Artesani Bookkeeping. Last week we went in pretty deep on the particular reports that we give and provide to our attorney clients, and this week we're going to talk about compensation programs or different ways attorneys pay themselves. Many of them are in partnerships, so they take distributions, and sometimes they're in an S corp, but A lot of times they take distributions and you have to understand exactly how they calculate it. Most of the time when they come to you, you find out that they're doing it on a spreadsheet and they're doing it manually. They're extracting whatever they need out of there, whether it's the sales or however the complicated calculations are done. And there's multiple ways attorneys typically pay themselves, and it's kind of been around for a while. you may have an attorney come to you that will say, are you familiar with the Eat What You Kill compensation platform? That's one of the more popular ones. But let me go through a few of them here, and I'll just kind of explain them really quickly so you can understand exactly what different ways it's been done. And hopefully some of them are moving away from some of these complex calculations, but you, you will see it if you work with mid-market clients and even smaller firms with a staff attorneys, that they want to keep them engaged in bringing money into the business and bringing leads in. So there's incentives to bring that, bring those into the business, into the law firm. So the first method is called the ruler or the monarch one. It's really that one partner is the decision maker, and then there's multiple attorneys that work underneath them. And they call it that because it's usually a smaller firm. And that usually is typically your rainmaker, your person that brings in the most business. And that person is the one that will determine how it's laid out. And we've had some pretty interesting ways that some of the attorneys have figured out how to bonus up the attorneys that work for them to give them— to incentivize them to work in bringing business in the door. So it's a little bit of a competition kind of a model, but it will work that they get bonused out as they bring the business in. So there's incentive to bring in more work into the firm. That can work, but it typically— the attorneys will get a base salary, so they agree on one salary and then they, they bonus it up. The other one is a partner share. So you will see this maybe with a couple of partners where they divide everything in half. And actually, Sarah and I do that. We divide everything 50%, and we have a partnership. We have a separate firm, and we do exactly that. We divide, you know, the business. This other business runs the expenses and the income for the work that we do together. And then we divvy it out and divide it out to our S corp businesses. That method is similar. You will find that as you look in the records, you may find that they're paying out a payment to another company, another— maybe an LLC or could be an S corp. And then maybe you find out from talking to the partners that they have these individual S corps that they pay themselves a paycheck out of, but they're paid out of the partnership. Partnership is paying out to these separate firms, and you'll see that a lot of times. It's very, very common. All the partners typically will take the same draw, or sometimes I have seen it where it will be based upon the amount of work. That makes it a little bit more complex who brings what into the door, and then the percentages might not be 50/50. You do see it sometimes, it's complete straight up 50/50. If in that case, if you do see that type of division in the, in the compensation reporting, which is typically an outside spreadsheet, know that it's 2 attorneys that have that same work ethic. They are both driven, they work the same, they take weekends off or whatever. You don't usually see it working really well when one partner works a real lot and the other one's taking a lot of vacations. So you have to have balance there. Again, the most popular one is that eat what you kill method. So each lawyer's compensation is based on the revenue that they generate. So it can be varying levels of income being generated to the firm. And then it's typically a formula on a spreadsheet. And they do factor in expenses. So you've got the partners. This is the partners that get this kind of a compensation, and they will have overhead. The partners will determine what is included in overhead. That could be, you know, the paralegal fee, and maybe that's divided up, maybe it gets divided up and classified. So this is where you're going to have to figure out how to make this work inside the accounting program to figure those numbers out. Maybe it's straight-up rent divided by 2 or divided by 3, however many partners, and then maybe utilities and office expenses are just divided equally. But then you might find that the paralegal or the extra wages from the admin may get split up by the amount of work that they're doing because maybe it's— that's not equal. So that's when it gets a little tricky. And then you can divide that up out on an invoice so that that extra billing from the paralegal is divide it out. Admin, not so much. You'd have to do that as an extra transaction, but it can be done. And it is typically— it's agreed on by the partners in the firm. And you have to find that information from speaking to the attorney. So you have to kind of pull that out of them. Most of them are pretty open about it because they don't like the spreadsheet. It doesn't always match what was— how it's calculated. It doesn't always tie back. And you want to have that tie back to those numbers as these people are compensated. So you really want to tie the the numbers back in. That's where we use classes in QuickBooks and we use custom fields. So those are the 2 biggies when trying to make this kind of thing work. You can use tags if you're not in Online Advanced, but I prefer to use the custom fields because then I can pull that data out in a detail report and then be able to use those numbers in an outside platform like Reach Reporting, which I'm going to take you to in a moment to show you the power behind that app. There's plenty of them out there. That's our preferred one, but you certainly can go to a lot of other ones as well. And then, of course, 99% of them that come to us have maybe done one of those partner method, method ones, or the eat what you kill, but they've kind of made this hybrid. So when they get the hybrid, you want to make sure that you understand the complexity of what they're doing so that you can help them calculate it going forward, automate that calculation so that you're actually pulling correct and accurate figures out of the accounting, and then use that in them what they need to pay. So you want to have kind of a tie back. I'm going to take you to Reach and I'll show you a lot of the power behind Reach. So you can do this if you're doing a migration. It's key to know this information so that when you set up QuickBooks, you're already setting it up for success later, that you're able to get the numbers out. What constitutes overhead? How is that calculated? So you know that with the income you're doing those percentages, maybe using classes and the attorneys are classed. And then you're calculating that overhead. And then when you shoot that over to a Reach or an Excel spreadsheet, you're able to figure that out so you can calculate exactly what the compensation is to each employee or each staff attorney or each partner. And then when you show those payments in QuickBooks, you build that out inside the system so that it pulls those numbers in and then extracts those numbers out so that you're able to tie it all back, maybe with a clearing bank account. Let me take you into Reach, and I just want to show you a little test drive of Reach Reporting. It's one of our favorites because it's so flexible for these types of things, and I'll show you exactly the power behind Reach. We've got some dashboards in here that are pretty darn awesome. So here we are inside of Reach Reporting, and this is one of my dashboards. So this is a dashboard from my demo file, and we created, um, Dream Dashboard 2.0. We obviously had a dream financial dashboard here that doesn't look like it has a lot on it. Uh, year to last month, which is like a trailing pro monthly P&L. And they've got some in here. Here's the original Dream Dashboard. So I'll take you to Dream Dashboard 2.0. Actually, let me take you to the pro monthly balance sheet so you can see. And you're able to really customize these yourself. So what I really like about this is if you're trying to do a report for an attorney and you want to show them like the balance sheet but pull out the IOLTA and the IOLTA banking account You are able to do that in Reach. You can actually come over and customize and pull out— if you go to edit, you can actually take off accounts. See these little gears and the eyeballs? You can see like what we've taken off, what things we aren't showing, which things we are. As you can see on this little chart, this is what we'll show and make viewable. So you're pulling in the balance sheet and then you may be shutting off some of the accounts that you don't want to see for the attorneys to see on this dashboard. They don't want to see the IOLTA. It's not their money. So we run into that a lot. And you will see that. You can work on the rows here and really get to see this. Let me go back to— you can see the preview. Let me go back to not editing so you can see some of the other reports that we've made. So you can make the reports not just like a report with numbers, but you can actually make these graphs, these cool graphs. You can see my working capital here. You can see my AR and AP and bank accounts total. So that gives them an idea of money that's going to be coming in the door. money that's going to be going out the door and the actual bank account. So you can see the bank account is here, the blue line. It's pretty neat. AR and AP is percentage of sales. And I can do this as a number, but I can also do this as a chart. Net equities, net assets versus equity, bank accounts versus current liabilities. So you have a view here of a lot of different things that you're able to customize. And there's a lot more inside of Reach if you start to play around. They've got a lot of cool templates, and I haven't really even— I haven't even been in here in a while because we've been so busy with end of the year. But there's so much more that you can get and play around with inside of Reach Reporting. So I hope that helps give you a little bit of an overview of the compensation models that are out there. And feel free to share on my Facebook page if you've seen some other ones. I'd love to know what other firms are doing and getting creative. We've worked with an attorney recently, and I really liked one of his models because it was simple. We have a private Facebook group called The Accountant's Law Lab. And in that group, we share some information, but where the real meat of what we want to share is in our private group called the Accountant's Law Lab. So you can join the Facebook group for free. If you want to join the private group, it's $87 a month and you can get one meeting a week with Sarah and I where you can brainstorm. We're going to pull up a topic and help educate people on different areas of working with attorneys and law firms. Also have a Facebook group called QB Community Live. It's more of a general business one, but it's also a fun place to be. So I hope you join us there. If you're an attorney or a law firm and you're looking for a bookkeeping service or accounting service, please reach out. We would love to help you. And on that note, I hope you all have a wonderful, wonderful week. Bye now.