Law Firm Compensation Models: How to Choose the Right Model for Your Firm
Law firm compensation models are a complex beast. Dynamic and transparent financial models can incentivize attorneys, giving them the financial opportunity they seek and mitigating an attorney leaving your firm for greener pastures. There are several ways to accomplish this task and much of it involves complex formulas and therefore, complex accounting.
No matter how you choose to structure lawyer salaries, you’re going to need a well thought out plan and the accounting and reporting tools to make it happen. It doesn’t have to be as mind-numbing as you would imagine.
There can be a lot of tension surrounding the methods of law firm salary range and compensation. The variety is endless as each law firm has its own needs and drivers for compensation. Black box models create tension and ultimately lead to attorney or partner dissatisfaction. This results in attorney churn. Better to be transparent.
There is not only compensation to determine, but also a subset of law firm profit sharing formulas that must be taken into account. Not only attorneys are the ones affected by these calculations, The firm leaders must also consider law firm support staff.
What is the purpose of law firm compensation?
That might sound like a silly question, but when you take a moment to think about the law firm’s goals, it’s not just to pay people their base salary. Of course, everyone wants to earn a living and feel like they are valued at the law firm, but there are other ways to think about how each law associate and each law partner contributes to the overall success of the law practice.
The law firm’s compensation system for legal services should take into account more than just hard data. How are the people who work at the firm contributing to the culture at the firm? If culture is a metric of success, how will that be measured? When the compensation committee determines the goals of the law firm, they can then determine how they want to reach those goals through attorney compensation. There is no right or wrong answer. Each law firm is a snowflake.
In many instances, a “partner” or attorney’s practice is a mini-business or co-op of folks running businesses within businesses. Today’s most successful firms engage and reward their attorneys with economic opportunities. It’s never been easier to start your own firm.
How do law firms share their profits?
Traditional vs Modern Law Firm Profit Sharing Formulas
Traditionally, law firm equity partners split the profits — PPP, profits per partner — whether equally or with a different division formula if there are senior partners with more equity than other partners. Still, there needs to be an accounting of the profits.
Traditionally, this has been done manually, often with spreadsheets in Excel. With the advancement of accounting technology, you no longer have to suffer through redundant manual labor and human error of data entry.
The allocation of PPP to shareholders can be distributed monthly or quarterly and by year-end, the total profit will be more clearly understood and adjusted accordingly. PPP can be calculated as revenue minus expenses (net profit) and divided according to the law partner compensation structure.
How is law firm partner compensation calculated?
LeanLaw’s Disbursement of Payments – Attorney Compensation
Eat What You Kill
The Eat What You Kill model is an entrepreneurial form of law firm compensation: the lawyer finds the client, does the work, and receives the revenue. In this example of law firm compensation, there is also law firm overhead to consider as well as the salaries of the attorney’s assistant and work done by the associate lawyers – usually purchased from the firm at set billing rates. The attorney can charge out the time of the associate at whatever rate she deems fair. Once the attorney pays all costs associated with the matter, she gets to keep the balance.
Eat What You Kill is usually seen in very small firms: two to four partners agree to split overhead and then focus on their primary practices. The challenge with this model is that the partners can get out of alignment with each other. One partner could be a huge earner while the other struggles. One attorney may like an office with staff, and the other may want to work virtually. Aligning on overhead costs and ensuring you and your partners are similar in billings is important.
When there is only an economic goal for the firm, the value of soft contributions to the law firm can be lost in the mix. What’s missing is how the attorney contributes to the value of the law firm: does she contribute to the community? How much pro bono work does she do? What kind of cases does she service? Are they in alignment with the law firm’s values and firm culture? Only hard data is measured here. If the attorney earns enough, the goal has been achieved. If that’s important to the firm, part of your formula for firm allocation can have a discretionary distribution component.
Hale & Dorr Formula
The Hale & Dorr Law Firm created this model in the 1940s. It’s an incentive based system that divides the collected (not billed) revenue into three categories:
- Finder — otherwise known as the originating attorney, the person who brings new business / new clients to the law firm, the “rainmaker”
- Minder – the attorney who is managing the matter and responsible for the client relationship, akin to a project manager
- Grinder – usually the lawyer doing the work on the matter. That could be a law firm partner, an associate attorney, or a paralegal.
An example of this kind of law firm compensation formula might be:
- 10% to the Finders
- 15% to the Minders
- 65% to the Grinder
- 10% to the law firm as a discretionary fund to be disbursed at the end of the year from a bonus pool.
LeanLaw clients favor this model: what’s most important in this model is that the rules and formulas are well documented and adhered to — and tracked with a modern accounting tool. A fancy Excel sheet or manual documenting is not going to cut it. Data transparency and flexibility are essential: Two lawyers always will want the option to cut a deal on a particular client and/or matter. The system should account for these scenarios.
Lastly: don’t overcomplicate the formula. We have seen law firms make this too complex. While they are trying to accommodate for certain instances of partners working on each other’s work, they get too caught up in the weeds.
As straightforward as this might sound, there is still a TON of accounting to keep straight. As automated accounting becomes more mainstream, this law firm salary structure can be extracted from the data entered as the work progresses. There doesn’t have to be a pile of data for the accountant to sort out at the end of the year. Keep is simple, transparent, and fair.
Watch this short video of how LeanLaw automates attorney compensation distribution
The Equal Partnership
The simplest of law firm partner compensation systems, the Equal Partnership has a straightforward equal partner share or equality within groups of partners. Most often used in small firms where everyone knows one another and there is an assumption that each law partner has contributed equally to the law firm profits – over the course of several years. This insulates an income partner who is having a tough year, economically speaking. Perhaps someone had more success in business development than in billable hours. Maybe last year was better than this year. This compensation plan makes sure that it’s not just about the hard data.
The Lockstep System
How to calculate the profit share in partnership for this formula? Some law firms base this on who’s been there the longest. Essentially, this system rewards loyalty to the law firm. This can be on an individual or a practice area basis.
This kind of formula — longevity rankings — has fallen out of favor for the main reason that well… it’s kind of a pyramid scheme. Those who join the firm last are paid the least, no matter how energetic they are in bringing in clients or accomplishing legal feats of daring. How does a law firm get a young law associate to set his career path in the firm if they are not going to get paid their worth for several years while those with years of experience but low income production are the top earners? In many cases, the Lockstep system causes attorney turnover in the law practice.
There may be plenty of practice groups that still run the firm’s business in lockstep, but there are few modern law practices that start out like today.
LeanLaw Solves Attorney Compensation and Distribution
When you decide the formula for attorney compensation in your law firm, you’ll need software like LeanLaw that can automate reports based on the data entered (timekeeping, expenses, WIP, AR, etc).
LeanLaw legal billing software delivers real-time, clear, detailed compensation reports when you need them. You are able to calculate and itemize timekeeper productivity and collected revenue at the firm, user, client, and matter level.
Within the software, you can run reports that line up with your firm’s compensation model so you and your team are no longer bouncing between various spreadsheets and dashboards. Profit fundamentals are crucial when deciding on accounting and reporting software for your law firm. LeanLaw is flexible and full-featured to handle even the most sophisticated compensation tracking plans.
Well Organized Compensation Makes Law Firms More Profitable
An important way to keep attorneys at your law firm feeling valued is to have automated, transparent, and dynamic compensation tracking. When lawyers feel in alignment with their compensation, the law firm will retain that lawyer for years to come. Automation also helps decrease costs. Lastly, the transparency of the software gives everyone the confidence that they are being treated fairly.
LeanLaw’s deep integration with QuickBooks Online gives you the real time data that makes your firm smarter. Easy to read reports give you and your team clarity and transparency with regard to attorney compensation. You’ll also have the ability to export the reports to Excel for further analysis.
LeanLaw customizes QuickBooks Online for law firms. You will save time and effort monthly, quarterly and annually with LeanLaw’s attorney compensation reporting solutions.
