One way to look at whether your salary is fair is to understand how a law firm calculates your value. We’re going to look at the numbers behind such a calculation with a concrete example and assume you’re a lawyer making $100,000 a year. This is intended only as a primer – adjust the numbers and add/subtract factors according to your own facts.
What is your value to a firm? Profit, of course
There are two bottom-line numbers to calculate your value to a firm in terms of profit: how much money you make for the firm, and how much money you cost the firm. The difference is the profit you contribute to the firm.
Revenue: How much you make for the firm
You bill 1,500 hours a year at $200 an hour. You might erroneously conclude that how much you make the firm is a straight line calculation of hours worked times hourly rate, or 1,500 hours x $200 = $300,000 revenue. But some clients dispute your bills. Some clients don’t pay at all, or don’t pay on time (cash is king, you know). So let’s take a 5% cut of that, which is $15,000. From a billings perspective, you make the firm $285,000 in a year.
There are also intangible marketing activities which you’ll want to put a dollar amount to. You do some lunch & learns for prospective clients on a quarterly basis. You give the occasional CPD talk. You chair a committee and an annual conference in your practice area. Your twitter account is followed by movers and shakers. All this gives visibility to your firm and brings clients in. Depending on how much you do, how visible you are, and how you shape the public perception of your firm, this number can vary. It also depends on just how much your firm values your marketing efforts – one firm may assign great value to this work because it doesn’t do much advertising and needs the outreach, while another firm overflowing with clients might not. Let’s put this at $30,000.
You also bring in a few clients. If the clients are yours, then the benefit you bring to the firm is the hours you bill on it. Let’s say you ultimately bill $50,000 on the files you bring in. This isn’t on top of the 1,500 hours you bill, but part of it. Which means, if the firm had a full thriving business, the firm can give those same billable hours from its existing clients to another associate – you have raised total firm revenues by $50,000. If the firm is not-so-thriving, then you have merely contributed to supporting your own salary.
Based on the above, you make the firm $285,000 billing + $30,000 marketing + $50,000 clients brought in = $365,000 in total revenue.
Expense: How much you cost the firm
The firm pays various costs to keep you as an employee. You receive full health benefits which cost about $4,000 a year. Your office of 150 square feet (give or take shared space) at $30 per square foot costs $4,500 a year. The firm provides you with a cell phone at $1,200 year.
You need support too. Your assistant is paid $65,000, with health benefits and space, so the total cost is $75,000. On top of your salary of $100,000 the firm pays EI and CPP benefits and matches your RRSP – let’s say these costs are about $8,000. Firm overhead includes an accountant and IT support, which pro-rated for you costs about $3,000.
Tallying up the total, your cost to the firm is $4,000 insurance + $4,500 rent + $1,200 cell phone + $75,000 assistant + $100,000 salary + $8,000 RRSP + $3,000 overhead = $195,700 an expense.
How the firm profits from you
Profit is calculated as $365,000 revenue – $195,700 expense, which means the firm made $169,300 of profit thanks to your efforts.
Is it fair to bring in revenues of $365,000 and get paid about somewhat less than a third of that at $100,000? It turns out this ratio – a salary of 1/3 of revenue – can be used as a measuring stick. Anywhere from 1/2 to a 1/4 of salary can be normal, depending on your years of service, experience, importance to the culture, and, in a word, your fungibility with the firm.
If you don’t like the deal – what are your alternatives?
You can take your clients and start your own firm, reaping all the profits on your own. Whether this works out depends on your ability to make rain, manage a business, and manage a practice.
You can take your talents to another firm that will pay you better. You may have to put in more hours or bill at a higher rate. By the same token, if you’re undervalued, you may get a raise simply by changing jobs. Another way to measure a fair salary, after all, is what the market will bear – what you (and others) are willing to accept and what employers are willing to pay for your services.
You can also negotiate with your firm. Here it helps to understand your intangible value and market forces. Are your intangible contributions worth more? Should you be receiving a greater percentage of what you bring in because that’s the standard in your are of practice?
In my experience, law firm partners are willing to discuss the numbers. Having an understanding of the numbers will help you navigate a bad year – it may not be as bad as you think. There might be leeway in meeting your targets. If you don’t meet your targets, you know what the effect is – have you failed to breakeven? Will next year be a much better year? With enough knowledge you can forecast your own future. It pays to know how you’re paid.