How do you design compensation plans that are good for your law firm and the new hire? Follow the wise counsel of the rule of thirds.
This is one of the tightest hiring markets we have seen in the legal industry in a long time, if not ever. Compensation plans have become a hot topic as competition increases for good attorneys. Yet here’s the problem: You still need to be profitable.
We have a client in the Pacific Northwest whose team keeps getting approached with offers trying to lure them away. They are loyal and want to stay with her, so they’ve kept her informed about the various offers. We analyzed eight of these offers and found one consistent thing.
Not one of them was going to be profitable to the firm.
Of course, the question you are asking is, “What do you mean by profitable to the firm?”
The Rule of Thirds
We believe that you should run a firm based on the “rule of thirds.”
- One-third goes to the people doing the work (payroll).
- One-third goes to overhead (all the other expenses, including marketing).
- One-third goes to profit.
This means that, at the very least, you need to have billable employees billing and collecting three times their cost of employment. We generally want your billable team to have a multiple between three (3x) and five (5x).
The question I usually get at this point is, “Why do we want 5x if we only need 3x?”
Simple. Your billable people need to pay for your nonbillable people — like your receptionist.
But first, let’s start with analyzing attorneys.
Compensating the Grinders, Minders and Finders
All attorneys go through an evolution in their careers. When they start out as freshly minted first years, they know … basically … nothing. There is an unspoken contract that you will teach them how to practice law and pay them a living wage, and they will churn out billable hours.
Since you know it will take them twice as long to do something, their billing rate is half of what yours is. It wouldn’t be fair for the client to pay for their learning curve. In return for the patience you (hopefully) exhibit as you train them, you need to get five times (5x) return on them. They have no other responsibilities within the firm but to bill. We call these baby attorneys Grinders.
As baby attorneys learn and grow, the agreement changes. You discover new talents in them and assign them new tasks, such as supporting client relationships and even training some younger attorneys.
We call these attorneys Minders. Minders’ time is split between their traditional billing responsibilities and their new responsibilities, so the amount of time they spend billing goes down. Fortunately, this is offset by their rising billing rate. Unfortunately, since their salary is also rising, their multiple declines to around 4x.
And then there are my favorites — the Finders (also known as Rainmakers). These are usually the firm owners. It is the Finders’ role to go out into the world, club potential clients over the head, drag them back to the firm by the hair, and deposit them in the laps of the Minders. Do they know where the courthouse is? They might need to use Waze. Do they bill? Some. But when they do bill, their rate is higher than a cat’s back, as my friend Suz says. Which is good because so is their salary. When you have a Finder, you want to do everything possible to get that 3x multiple on their comp plan.
Which brings us back to today’s hiring market.
Designing Attorney Compensation Plans
How do you design an attorney compensation plan that is right for your firm and the potential employee? You know the multiple you need to get to keep the firm profitable: total billed and collected divided by the total cost of employment.
But what will motivate your new employee?
There is a saying, “When you have a hammer, everything looks like a nail.”
Law firm owners seem to think the only tool they have when offering a job is salary, and that’s simply not true. How entrepreneurial is this employee? How motivated by money? There are lots of levers you can pull to design a compensation plan for a specific person that is right just for them.
Here are components you can use in the plan:
- Billable hour minimum
- Billable hour goal
- Origination bonus
- Billing bonus
For someone motivated by money, you can offer a low salary and a lower billable hour minimum. Then you can give them a tied system where they get an ever-increasing percentage (up to 33%) of the hours they bill (and collect) — billable hours goals and billing bonus. What’s the downside? They might decide not to work as much for one month because they have that option. They have a low billable minimum. The good news is you have lower payroll.
On the other hand, risk-averse people will be much more attracted to the traditional high salary and a set minimum billable hour goal arrangement.
And there are those people who just love to network and will be motivated by an origination bonus. My brother started at his first law firm with a guy who didn’t know where the courthouse was and could hardly find the office — but, man, could he originate! He made a ton of money for the firm.
What’s the Silver Bullet?
I know you started reading this hoping I would give you the silver bullet to solve your compensation problems. Unfortunately, there isn’t one. And if people tell you there is — and they are happy to sell it to you — RUN. There are options, and there are guidelines, such as the 3x to 5x multiple.
You need to do what is right for you, your firm and your employee.
My parting thought is this: If you compromise and give somebody a compensation plan with a multiple of less than three, you (the owner) pay the price because your overhead won’t change. Your profit is the only place where there is room for change. And it will go down.
Are you willing to pay that lawyer at the expense of your family?
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