Think You’re Underpaid? Get Real Before You Leap
Debra L. Bruce, JD, PCC.
An in-house lawyer (let’s call her Sara) contacted me about helping her design a business plan for starting up her own law firm. I commended Sara’s wisdom in creating a business plan before leaving her corporate job. Surprisingly few lawyers actually do that. She explained that she needed the business plan in order to get a bank to lend her operating capital. While I silently questioned how realistic her expectations were, I asked how much she intended to borrow. She said, “I only need enough to cover my living expenses for a couple of months. Just until the money starts coming in.”
Sara didn’t yet have any clients identified to take with her to her new firm, but she “knew a lot of people.” She was surprised and chagrined when I suggested that she should save up enough to cover her living expenses for a year before launching her new venture.
From Associate to Solo
A young lawyer (let’s call him Joe) struck out on his own because he did not believe his law firm was paying him enough. An experienced lawyer in the same area of practice (let’s call him Raul) congratulated Joe on the birth of his new law firm. Raul offered some encouraging words: “In a couple of years you’ll be making some good money.”
Joe’s face fell. “Will it really take that long?” he asked incredulously.
Raul began thinking about bringing in an associate to relieve some of his heavy caseload. He decided to broach the subject with Joe, who expressed interest. When asked what kind of salary he would expect, Joe did not hesitate to name his figure. The number he gave amounted to 88% of Raul’s current take-home pay! Raul decided to let Joe experience the challenges of building up a law practice for a few months before raising the subject again.
My Own Naïveté
Many years ago, as a third year associate in BigLaw, I calculated the revenues represented by my billable hours times my billable rate. My salary amounted to about half of that figure, and I concluded that the partners were making a fortune off of me and my fellow associates. Today, however, I know that in BigLaw, most law firms do not even turn a profit on their associates until at least the fourth year. In addition to ordinary business overhead, the law firms have large sunk costs in recruiting, managing and instructing the associates, as well as the lost opportunity cost of unbillable partner time invested in those endeavors. On top of that, partners usually wind up writing off significant amounts of associates’ billable hours due to their inefficiency and steep learning curve.
I share these stories to illustrate the point that most young lawyers have no idea how long it takes to build up clientele or how much it costs to run a law firm. You might be overworked, but before you decide you are underpaid, get real with yourself by doing some investigation and calculation. You may not be aware of all that is included in the overhead attributable to you.
To help you in running some rough calculations, here is a non-exhaustive list of overhead items to consider:
First consider the costs allocated directly to you such as your salary, payroll taxes and benefits and the pro rata portion of such costs attributable to administrative assistants and paralegals assigned to you, plus your continuing legal education, bar dues, membership fees, parking, etc.
Second, consider your percentage of the firm-wide personnel costs: reception, accounting, IT, office manager, file clerks, and any other staff salaries, plus related benefits and costs such as payroll taxes, health insurance, vacation and holidays, sick leave, parking, over time and bonuses.
Finally, consider your percentage of the general overhead for the following items: rent, furniture, equipment, software and other technology, property tax, utilities, client development expenses, repairs and maintenance, property and general liability insurance, malpractice insurance, Lexis, Westlaw and other subscriptions, firm membership fees, office supplies, websites and advertising.
A Rule of Thumb
As you can see, there are substantial costs beyond your salary to be considered in determining how profitable you are. For most solo practitioners, the overhead expenses range from 45% to 55% of their gross revenues. If you don’t want to do the hard work of identifying all of those costs described above, use that as a rule of thumb. So unless you are bringing in significantly more than twice your salary and bonus, you may not be profitable at all. For an excellent article about calculating your profit and loss equation to the firm, check out The Profit and Loss Equation for Associates by my friend Ronda Muir, and her colleague Tanja Diklic.
Lean and Mean
You may dream of being your own boss, running a lean and mean shop with a lot less overhead than your current organization. With the technological advances of the last few years, that is undoubtedly an option. Just don’t underestimate the three crucial responsibilities in the success of any law practice: (i) client development, (ii) collection of fees, and (iii) taking out the trash. Well, you may not really have to take out the trash, but you will have a lot of administrative duties that hinder your ability to rack up billable hours. Almost all businesses wind up writing off some accounts receivable, and for most lawyers, it takes a lot longer to bring in new clients than they expected.
I don’t want this article to dash your hopes and your belief in yourself. I want it to encourage you to do some realistic assessment and planning so that you don’t get dashed on the rocks.
Post by Debra L. Bruce reprinted with permission from the June 16, 2011, issue of The Legal Intelligencer. (c) 2011 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.