How to Pay a Law Firm Associate

Determining an Associate's pay scale can be one of the more challenging decisions a law firm owner has to make. And if they get it wrong, oftentimes it affects the direction of their firm.

Yes, it's that crucial to make sure we get compensation nailed correctly.

Hi, I'm Richard James and I've worked with over a thousand law firm owners just like you.

For the past 15 plus years, and I can tell you after working in multiple different practice areas with law firm owners. One of the most common questions I receive is,

how much should I pay my associate attorney?

 Now this question oftentimes comes when either A, the law firm owner is trying to grow in their level one law firm ownership, and still maintain the ceiling of that.

Kind of million, million two, depending on practice area and keep it small, keep it all they're doing what we're telling 'em to do and maximize profitability. Get home in time for dinner. Have your weekends, take your vacations and still, build a wildly profitable law firm. It allows you to do what you want to do, but you don't want to go to the CEO level so that sometimes those folks need to hire another associate.

Again, this is depending on practice area, but oftentimes that happens.

 Or we have the level two law firm owner who we, we call, they're in law firm ownership Hell. And they're trying to replace themselves, and maybe they're hiring one of their first associates because they've been responsible for billing, and maybe they're billing a million million, 2,000,005, maybe $2 million, and it's all on their shoulders.

And now they've got this team and they can't grow the team and they're in what we call law firm ownership. Hell, like they do their legal work all during the day, and then they go home at night and they do payroll and admin and answer emails. And they, they put out fires, whenever they have to throughout the course of the day, and then they work Saturdays and Sundays.

They never take vacations. They never have time off, and they are just stressed all the time. That's law firm ownership. Hell.

 

The good news is you can get outta law firm ownership hell as fast as possible. The bad news is you're gonna have to pass through it if you wanna get to the next level, which is the CEO level.

The CEO level, if you might be hiring another associate, because you have to build capacity for your firm depending on the type of law firm that you have. And if you're at the, investor level, you wanna make sure you have enough attorneys to maintain capacity and you're doing it efficiently so that you can maximize profitability so that you return on investment, from your original firm that you built at the investor level, is now paying off in dividends.

So how should I compensate these attorneys? It depends, right?

 

It really depends on are we charging flat fee? Are we charging hourly? Are we charging consistent cons, contingency?

Are we charging some like combination in between in our firm? And then we have to ask, what level law firm owner are you? That's super important

passing through this kind of matrix of decision making processes, this is how I diagnose how we're gonna compensate these folks.

There's a difference. So if I've got a flat fee firm, I want us to take vanilla cases more than hamburger cases, meaning the easy cases, more than a complicated cases.

Complicated cases in a flat fee world oftentimes don't work because if I didn't price it properly, if I didn't come up with a new flat fee for that case type.

Then probably,, my margins have gone down because I've got more hours into that case than I should have.

And if I do have to get customized pricing now I've really complicated the sales prices.

So I really wanna develop a flat fee practice that takes on the basic vanilla cases as often as possible until we perfect our systems.

And so there's gonna be cases we're just gonna say no to anyway. In that type of case where we want to be as efficient as possible and we want to have our legal team, be as cost effective as possible. And we only want the legal team doing the things the legal team should do.

 ​

 When I first started working in a law firm, I worked with a fellow who taught law firm some marketing stuff, and his business was broken.

He hired me to fix his business. I fixed his business. And then he said, do you think this will work for lawyers? And I started teaching from stage these principles that I had learned through my business career. One guy saw me teach and said, Hey, how would you like to prove this stuff really works in a law firm?

And so that's what we did, and we grew that law firm from two guys sharing a desk to three and a half million in a couple years.

Great story. Most important part of that story is the law firm owner was able to not have to take work nights and weekends, and he was able to take his first month long vacation within the first 12 months of us opening the firm and so on and so forth.

And so all of that was a really big deal. But suffice it to say that we had to figure out how to hire associates and that was a flat fee from two things we focused on were bankruptcy and tax resolution.

 

Now, in that bankruptcy and tax resolution, both of those situations, yeah, if we got hamburger cases, we could charge more, but really 80 to 90% of the cases we wanted.

Were more vanilla cases. Even though chapter thirteens were worth more simply because of the process of the court system in Arizona at the time, and we didn't really want Chapter 13 cases.

So we were building almost everything around these chapter seven cases. And so I just needed an associate that could manage the work of a Chapter seven case. All I wanted them to be able to do was. Review petition. So meet with a client to make sure that they got all their legal questions answered after the client retained the firm, review the petition, and then I needed them to make sure the petition was correct and be there for the signing appointment.

For any last minute questions, show up to the 3 41 and then handle whatever post 3 41 work might take place for outlier situations. And that's all I want 'em to do. I didn't want them to have to communicate with clients at all. I never wanted 'em in the sales process. I didn't have 'em do any admin stuff.

Their emails should almost have been zeroed out completely. All they should have been doing was legal work all day long.

And because of that, I was able to get bankruptcy attorneys with 1, 2, 3 years experience, sometimes even no experience. Bring 'em in, teach 'em what we needed them to know to do and pay them 40, 45, $50,000 a year.

So that's like a flat fee example.

Well, what about an hourly example? Hourly kind of depends. So if you're a family law firm and you're billing out at $350 an hour, by the way, you're not billing enough, you should be at 3 95 minimum whole nother conversation for a whole nother time, and most of you should be closer to $500 an hour.

Most family law firms are gonna have an average of around 30 hours in a case, give or take, certainly they're outliers. You have some firms that take really high end cases and some firms that do nothing but low end work. But for the most part, family law firms are about 30 hours in a case.

And so what we know is that we have to make sure when we're building a compensation plan for this attorney, we have to take all this into consideration.

Now, if you're an hourly building firm you want to think about a couple of things.

 

You want to think about the rate that, that you're billing at you. You want to think about the hours you expect them to bill every single month.

We call this the realization rate. That's the collection rate, that's of the dollar you bill, how much of that do you actually receive in payment?

And then you have to think about, a little bit about experience. And you have to think about what they're gonna be doing. Like what is their workflow, right? And then as I said, you have to pass this through the filter. Are you a level one, level two, level three, level four law firm owner.

If you are a level one law firm owner and you need this associate to do a bunch of other things besides just the legal work. For whatever reason, even though I don't recommend it, you're gonna have to take that in consideration when you're building their compensation. The other thing I will tell you that you're gonna have to take into consideration is you're gonna have to understand what the market.

Rate is

you need to know what your market rate is in your area.

When it came to hourly billing, I would look at paying them a percentage of what we realized. So if we realized a thousand dollars, they would get a percentage of that a thousand dollars.

And that percentage typically was 27 to 33%. And I will tell you that I like to use that as a baseline when I'm dealing with hourly billing associates. Okay. 27 to 33%.

 

Why is this so important?

Well, because it lets you understand, , if you are on track or off track, if you're overcompensating somebody. I have met firms that they're doing multiple seven figures and they have a salaries to wages component that's ree up 60% of their gross revenues. Well. That means that you're 15% over where you should be and actually you should be at 45%, and if you're at 60%, you're actually closer to 30% over.

'cause 30% of 45 is closer to 15%, right? So you're actually 30% over where you should be.

So I want you to be maxing out at 45% of gross revenues to salaries. In your p and l and if you're not well, you've got a real problem.

If you do have that problem, you're not gonna be able to grow and you're not gonna be able to grow profitably, which is what happens to law firms all the time.

 So this, this kind of earmark for an hourly billing firm is just 27 to 33%, but. Some things affect that, like rate affects that.

hours a month. That's: 1800

And you sent them all that business, they're not expecting necessarily. To realize, you know, $600,000 in compensation. My experience is if they're making three to four, they're usually very, very happy. That's usually about where they're gonna be offered somewhere in that three to $400,000 range, and they don't think about higher than that until they get to partnership level.

, and you expect them to bill: 1200

130 to $180,000, depending, that's about what we should expect to pay that associate. Now, here's the problem. When we just use a percentage and we don't build, use a salary of some sort, what happens is the associate. It ends up with up and down income cycles, right? So one month they make a lot, one month they make less.

Just simply because of the nature of how things go. Either deal floor comes in. The other thing that happens is that the attorney is now compensated based off of your firm's ability to collect. And if your firm is lousy at collecting, and you pay an attorney based on how much was collected, and you should never pay them on how much is billed, you should always pay them how much is collected.

But if you pay them on how much is collected, and your firm sucks at collecting money because you just have a lousy system in your collection system or your AR system, well now that attorney's being punished for something they didn't do, and so their compensation's directly affected. So they're not gonna like that.

So my suggestion for hourly to make this down and dirty and simple for hourly. In, in my opinion, we should identify the market based range, right? So for the market, based on the experience level that you need, um. So what is that equal? Does that equal $120,000? Okay, so is it equal $120,000? Okay. So if that's $120,000 for that market based person, for that experience level, fine.

If I know then I'm gonna have them bill out a hundred and, uh, 20 hours a month, and I know I'm gonna bill out at $400 an hour, uh, then I know I'm gonna generate $600,000. In at least invoices. I don't know what your realization rate is, but let's assume it's a hundred percent for the sake of argument it's not, but let's assume that it is.

And so if that's the case, they're gonna generate $600,000. I know that if the market level is that and I'm willing to pay 'em around 30%, well, I know that I, the 30% of 600,000 is 180,000. Right. And so I know that if market is this, I can make sure I make an offer to them. That's like a little bit over market.

So I would make an offer to an associate attorney with that experience and I probably offer them 1 25, right? And I would then at a bonus, and I would do that quarterly and I would have the bonus. Kind of be contingent on them hitting their billable hours, right? Because that's really the one thing they can control.

And then I'm gonna get their bonus to get them to another, maybe $20,000, maybe more, but somewhere in this range. And I'm gonna get them to be able to earn 1 45. Now if market based wage for that job is one 20, and I can show them clearly how they're gonna get more than market based at their base salary, and I'm gonna show them how they can get a bonus, takes 'em to 1 45.

And I know that that's gonna take us under our 30%. Now what happens is we can grow, I can raise their hourly rate, I can have them bill more hours, and I can make sure that the firm earns more without having to constantly give up this percentage. And so my, my margin grows as the firm is able to get better at charging per hour, get better at the realization rate, and get better at making sure the, the attorney bills more hours.

And I can always make this bonus juicier if they bill more hours and I have some room to play so they can actually make more money than this. This way they're well compensated. Okay? So now we're overcompensating them. We're giving them consistency. So now they get. A consistent earning cycle, right? Not up and down.

They're getting a consistent earning cycle over the year, and that makes them happy and they can feel like they're paid more than their peers. That makes them happy and they know that they can make bonus so that it's gonna inspire them to hit their goal that makes them happy. All of this is a system that works together.

That's how I would build out an hourly compensation plan. Now, there's a caveat to this. If you have to hire somebody with an experience level that's extremely high, an extremely high experience level, and that means that you need to pay them, well, let's say closer to $250,000. And it's not because your firm bills out a thousand dollars an hour.

It's because you're, let's say you need a, you have a criminal firm and you need a, a, somebody who can do all the sex offender cases, and you normally do the sex offender cases, okay? Or you take family law, but you take the high asset family law cases, or you do estate planning and you do the high asset protection cases.

Okay? So you get my point and you wanna replace you, and you're gonna have to pay that person $250,000 a year to do that. You're still gonna have to build out this compensation plan the same way. Now, one thing I want you to know about this is if you don't build out a compensation plan similar to this that makes them feel good about what they're getting, chances are pretty good.

It's just a matter of time before that high level associate. Ends up going out on their own. Now, sometimes you get lucky and you get a high level associate who already went out on their own, realize they didn't like owning a business, and they just wanna do the practice of law and they just wanna be paid really well for it, and they're very good at it.

And so that's great. Those are the types of people you wanna find. But if you don't, you better make sure your compensation plan is in order. Sometimes you're gonna want to, as you grow and you get to the CEO level, you're gonna need a managing attorney who's also gonna do some hourly billing and gonna manage all the other associates.

That person's probably gonna build in there as well. So there are more questions to this as you continue to grow, as you continue to replace yourself in the higher level cases. And, and in an, obviously in an hourly billing firm, it's not about efficiencies as much, it's about billing hours. And so as compared to a flat fee firm where it's about being efficient and paying the least amount for the attorney, in the fa in the hourly billing litigation type firms, this is different.

You gotta have a different level of associate, and so you need to be well within range of market based wage. Okay. Hope that helps. The last that we didn't talk about yet was this consistency or this contingency, sorry. Was contingency. And so what I'll tell you about contingency is. My, I just have a warning for you around contingency.

So I, I met a guy once that was paying, it was in a contingency firm, and , he was doing like eight figures, okay. And he decided that he wanted to take care of his associates. He just felt this kindred spirit to his associates that he felt like he couldn't have the practice if it wasn't for them. And he owned a contingency firm, a PI firm that did mostly vanilla cases, not thousands of. Basically five to $7,000, $10,000 cases every now and then they ran into the high-end case like a PI firm does, but that wasn't where their bread and butter was. And all the associates they had were doing basically the simple work and in this firm, the vast majority of the work was being done by non-attorneys.

But the attorney did have to get involved for obvious reasons at different points in the case. And this associate, this law firm owner felt like they needed to pay these associates 2 53, 400, $500,000 a year. And they were, he built a, a percentage based compensation plan for these attorneys who are running the contingency practice.

And I'm gonna tell you that that's a mistake. So you don't wanna run a contingency practice and have a percentage based compensation for your associates. You're gonna want to use the market based wage strategy. So you're gonna find what the market based wage is for the associates in your geographic area for the type of practice area that you're in.

And you're gonna want to build a structure where they have to, they're gonna be compensated at that market based wage plus bonus, and you are gonna set up some very specific particulars about how many cases they have to work now. The secret to all of this, okay. The secret to all of this is the number one way for you to make your associate happy.

Besides once compensation is out of the way, the number one way for you to keep your associate is to have them do as little have them. Do as little non-attorney work as possible. You really only want them doing things that require a bar card. Now that might require a carburetor adjustment in your thinking.

That might require a carburetor adjustment in your thinking. You might need to understand that the way in which you are the, sorry, you might need to rethink. Exactly what work an associate in your firm actually needs to do. You might think work needs to be done by an attorney, and the reality is it can be done by a non-attorney.

A lot more work can be done by a non-attorney than you think you can. A lot more attorneys, law firms have their associates do work that the attorney shouldn't be doing. You should remove all of the work that can be done by somebody else. Client success, phone, returning phone calls, even managing inbound emails, getting commonly asked questions answered.

Dealing with all of those things by somebody else other than the attorney, and have the attorney just do the things that require a bar card. Sure. Some of this is practice area specific. But I will tell you if you want a happy associate, find a build a system that doesn't have them doing a bunch of stuff they didn't go to law school for, that will make them happy.

Most attorneys are miserable 'cause they're doing a bunch of work they didn't feel they went to law school to do. So. If you have 'em, do just the things that they went to law school to do, you'll find one, they're gonna become very, very good at it. And two. Uh, they're gonna be much happier than they would be if you hadn't, and you mix that together with a compensation plan that matches at or above a market based wage.

All of a sudden, you're, you, you can start to keep attorneys for a long time. Now, I think you'll notice in the flat fee scenario, I didn't suggest that we actually are trying to look for market based wage at or above. I shouldn't say that. I just, here's my experience in a flat fee firm. That takes vanilla cases.

You should be prepared for your associates to turn over. Some of them will stay with you, but the reality is, is you're gonna have a ceiling of which you can actually pay those associates to maintain your profitability. 'cause for most of you, there's a ceiling to how much you can charge. Now you want to charge at the top of that ceiling, but still.

Um, you are gonna have a ceiling as to how much you can pay that associate. And so because of that, uh, you're gonna have turnover in that role and you should just go into it expecting that. Now, they might stay with you a year, two years, five years, I don't know. But as the attorney who's in a flat fee world starts to hit the ceiling, now's the time they come knocking on your door and ask 'em to be partner.

And that's the time. It's to tell them, you know what? We're gonna need to find your replacement. Why don't you go out and start looking for another job? It's better to find a job while you have a job, and I'll support you in this, but you're at the top of the compensation plan. You're super talented. You should go somewhere else and earn more, but being here is not where you'll want to be.

Just do me a favor. I'll help you along this line. Just help me train the next person coming in, and we'll walk this together like that. Really, that conversation needs to happen. If you start overcompensating your flat fee attorneys, what you're going to find is that your margins are gonna dip. And when you're a margins dip in a flat fee world, there's not a lot of other places to make it up.

If you're making yourself efficient in all the areas that we talk about in other training courses along the line, okay? Hope this, you found this helpful. If you have questions, you can comment or you can ask the questions in the comments. You can like, or subscribe. If you want to do ho again, let's go ahead and build your law firm better.

One Associates compensation at a time.

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