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 that works within their budget.

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, have to let employees go, 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 top talent to the law firm. When that occurs, it is hard for a law firm to hire lawyers. 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 the law firm’s budget and forecasts.

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 a base salary of 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 lawyer argues today that the new norm for paying an associate is 20 percent of the revenue they generate for the law firm. The rationale for the 20 percent argument is challenging economic conditions and rising benefit costs, including health care costs. Such a position also makes sense when considering inflationary factors, including the cost of advertising to bring in potential clients when an associate does not have their own book of business.

While many law firm associates may not like hearing that their base salary should be somewhere between 20 and 33 percent of the revenue they can reasonably be expected to earn, the reality is that law firm owners would be wise to heed this guidance. If they pay more than this amount to attract or retain talent, they will likely put themselves and their firm in financial trouble.

Many law firms specifically get themselves into trouble by offering a base salary that is not within the 20  to 33  percent range of the revenue the lawyer can reasonably generate. Instead, many law firms set salary ranges solely on online salary data or what it takes to hire lawyers away from their competitors. When that happens, many law firm owners become frustrated when their lawyers do not meet their billable-hour or revenue requirements. They also suffer financially, and the firm’s viability can be jeopardized. 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 also wonder whether incentives, in addition to the base salary, will motivate lawyers to meet their productivity metrics. Paying lawyers incentives 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, although complicated formulas can lead to computation disputes with associates.

Truth be told, 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. Yet what many associate attorneys fail to realize is that, if they ever become partners, there is no guaranteed salary. If the firm is not making money, they do not get paid.

In the end, law firms that want to be fiscally responsible need to follow the guidance above. Suppose an associate intends to depart for a higher guaranteed salary. If they are asking for more than 20-33% 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. If they do it often, the firm can struggle to succeed. The law firm should instead hire another lawyer with a reasonable salary expectation and move forward.

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