How much a law firm should pay an associate attorney is an age-old question that many law firms consider. Many law firms debate this question, making it difficult for them to develop a workable formula.
Law firms often gravitate to one of two extremes. One extreme is that law firms overpay associates to lure them to work for their firm. However, if a law firm overpays for talent, the law firm owner often makes no money themselves. It may also be challenging to meet other firm financial obligations if the payroll is too high. Law firms that pay associates too much money ultimately get overextended and implode.
To a lesser extent, some law firms may not offer enough in salary. If that is the case, it is hard to attract any talent to the law firm. When that occurs, it is hard for a law firm to grow. Law firms do need to consider average salary data to determine a reasonable pay range. Yet, the salary data is not the be-all and end-all. The numbers still have to work financially, based on your law firm’s financial numbers.
What Is A Reasonable Way to Pay Associate Attorneys?
Every law firm is a little different. Depending on the practice area, how a law firm pays associates can change. However, many prognosticators argue that a law firm associate should receive about one-third of the revenue generated by them. Many would refer to this system as the “old rule of thirds” for paying lawyers. Under this system, one-third goes to the lawyer, one-third to overhead, and one-third to the law firm.
Thus, if a lawyer brings in $300,000 in actual revenue, many would argue the lawyer should make about $100,000 per year. Of course, the analysis gets complicated when the lawyer did not bring any of the business into the law firm, but instead, all their revenue comes from cases generated by the law firm’s marketing efforts, given that marketing is often expensive. With increasing overhead costs, including rising health care costs, the formula can also be more complex.
Collection rates can muddy the water, too. If a lawyer bills $300,000 in billable hours per year but collects only $200,000 of that amount, the associate would not receive $100,000 under the rule of thirds. Instead, to the chagrin of many associate attorneys, they would receive a salary of $66,666.66.
One author argues today that the new norm for paying an associate is twenty percent of the revenue they generate for the law firm. The rationale for the twenty percent argument is challenging economic conditions and rising benefit costs, including health care costs. Such a position also makes sense when considering inflationary factors.
While many law firm associates may not like hearing that their salary should be somewhere between twenty and thirty-three percent of the actual revenue they generate for the law firm, the reality is that law firm owners would be wise to heed this guidance. If they pay more than this amount, they will likely get themselves and their firm into financial trouble.
Many law firms specifically get themselves into trouble by offering a base salary that is not within the twenty to thirty-three percent range of the revenue the lawyer generates. Instead, many law firms set salary ranges solely on online salary data. When that happens, many law firm owners become frustrated when their lawyers do not meet their billable-hour or revenue requirements. Thus, law firm owners need to follow the metrics of their lawyers and law firm to ensure that the salaries they are paying make financial sense.
What About Incentives On Top of Base Salary?
Many law firm owners wonder whether incentives will motivate lawyers to meet their productivity metrics. Paying incentives to lawyers who exceed revenue goals probably makes sense for many law firms. By doing so, lawyers have an incentive to exceed their goals because they will make extra money.
Law firms can set up incentives in many different ways. A law firm may:
1.) Pay a set discretionary bonus to an associate lawyer who met the billable hour and accounts receivable goals;
2.) Pay lawyers a discretionary bonus if they bring in a case outside of the law firm’s marketing efforts; and/or
3.) Come up with a formula-driven bonus system that pays associates a portion of any profit they make for the firm.
However, candidly, many associate attorneys are not impressed by incentive-based pay. Most are merely looking for guaranteed money — and they will jump ship if a competitor offers more. In their defense, the desire to make the highest guaranteed salary possible makes sense when you consider that many lawyers are coming out of law school with significant student loan debt. It is also challenging to buy a home and have a family in this day and age with rising prices.
However, law firms that want to be fiscally responsible need to pay attention to the guidance above. Suppose an associate intends to depart for a higher guaranteed salary. If they are asking for more than twenty to thirty-three percent of the revenue they actually generate, most law firms should let them go. While it is often sad when an associate departs, the law firm is usually better off not to over-extend to keep them. The law firm should instead hire another lawyer and move forward.
If you have any thoughts, feel free to share them below.
The post How much to pay an associate attorney? first appeared on Kirk Stange on Law Firm Practice Management.
The post How much to pay an associate attorney? appeared first on Kirk Stange on Law Firm Practice Management.