One of the hardest parts of managing a law firm is the delicate balance between hiring the right number of staff members and ensuring that you can afford them.At different points in your practice, you’ll be tasked with questions like:
Can I afford to hire a new attorney?
What should I pay this staff member and still profit?
Am I paying too much (or too little!)to my attorney or paralegal?
Now, the solution to these problems is simple:hire the employees you need andcreate a compensation plan thatis profitable for both you and the employee.
Of course, that is easier said then done.So how do you figure out what you can pay a billable person?
Not long ago, our team at Cathedral Capital was working with an attorney named Lauren. Her firm had been growing, and she had hired several attorneys to take onthe extra cases. Every time she hired a new attorney, she would bump up their salary slightly from their last employer. It was part of her recruitment strategy.
One day, she was hiring anew attorney – a baby attorney – without a salary history. So,in order tofigure out what to pay this new attorney, she askedother firms what they paid their baby attorneys and then offered this new employee essentially the average of their answers.
To her, it seemed like these strategies of hers were working. But she soon realized thatshe wasn’t really making the kind of money she expected to make. Her attorneys were not bringing in the revenue that she expected,and the culprit looked to be her billing. She was frequently using more money than she wanted toin order tocover the overhead costs.
We have a very easy payroll math here atCathCap. Exactly 1/3rdof what gets billed, in total, should go to payroll. Not 50%. Not 40%. Only 33.3%of all billing should go to payroll – and that includes non-billable employees, like receptionists. If you’re spending more than 33% of your payroll, your payroll needs to change.
In order todo that, we needed to design a compensation plan for the baby attorney that covered not only his salary, but also the salaries of non-billable staff that was spent onother forms of overhead, like the time the receptionist spent on his work.
The Solution: Math
This is how we go about creating this compensation plan. First, we multiply their anticipated billable hours by their billing rate. Their billable goal was 1200 hours and their billing rate $300, so you get an estimated $360,000.
Now, this wasn’t far off from Lauren’s numbers. But here’s whereLauren made her biggest mistake. The average law firm only collects somewhere between 75% and 80% of what they bill.So, rather than basesalary off that $360,000, youhave totake 75% of thatnumber – $270,000. That is the amount you expect to collect.
In addition, one area that Lauren made a mistake was in how she defined payroll. Payroll is not just salary. It is also bonuses, taxes, 401K, health insurance – any benefits that she offered her employees.That 33% numberhas toinclude all of those things, which means that the actual salaries are typically much less than that33%.
If you want to be even more specific, you can also go a step further if youwant, anddetermine the salary of your employees by what’s known as the 3 to 5 multiple – also called the finders, minders, and grinders.
In a law firm, you typically have three types of attorneys:
Finders
Minders
Grinders
Depending on the type of attorney they are, they are expected to bring in an amount equal to 3x, 4x, or 5xtheir billable rate.
“Finders” tend to be the more experienced attorneys. While they have billable hours, a large portion of their work is also spent finding new clients. That means that they don’tspentquite as much time billing, but their higher rates and ability to bring in new clientele make them worth it.They’re going to have a 3x multiple – meaning, they should bring in a total revenue that is 3x theirpayroll.
Next are the “Minders.” Minders are the ones that tend to take on the clients that the Finders brought back.Their job consists of client management, training some of theyounger attorneys, and spending their time on other tasks in the firm. But a lot of their time is also spent on billable tasks. “Minders” should bring in about 4x theirpayroll.
Finally, we have the “Grinders.” These are usually the younger attorneys. They don’t manage clients as much. They don’t find new clients. What they do is grind – they do the work.The vast majority oftheir time is spent hard at work doing billable tasks.
Grinders aredo a lot of billable work.Oftenthey do as much as 1400 hours.
Sohere’s how you can determine their compensation:
Say they’regoing to bill at $300 an hour. That’s a total of $420,000. If you collect, say, 80% typically at your firm, that’s $336,000. Finally, since they’re grinders, they’re a 5x multiple. Take $336,000, divide it by 5, and you get $67,000.
That means you should be spending $67,000 total on the young attorney’s payroll. Keep in mind, that’s their entire payroll, including taxes, insurance, benefits, and salary.In the end, the baby attorney is probably looking at a salary of about $55,000.
(Note: You can also use the same math to determine if your other attorneys are overpaid or underpaid)
Determining how much to pay, when you can hire, how much you should be profiting, and more, can seem a bit challenging at first. But once you’ve implemented a system into your firm, it becomes an easy process thatyou can use to manage all your payroll practices.
If you’d like some free resources to help you manage payroll at your firm, click here to download them for free. If you’d like personalized support from our fractional CFOs in creating a more profitable company, click here to schedule time to talk to one ofCathCap’sexperiencedteam members.
