My experience across Australasia consistently demonstrates this sad reality, and quality law firm surveys pinpoint the numbers year in year out…
Many principals make little more than a decent salary…and far too many not even that!
Talking to the head of a leading, fast-growing, firm in the last few days I was reminded that the principles used to assess “proper returns” in larger firms apply equally well to smaller ones…
In the firm in question principals have a base salary…there are dozens of principals and the base salary is almost never the same, but we can assume it starts between $200,000 and $250,000 a year.
This is for turning up and doing the basic job expected of a principal.
The base salary is indexed annually.
Principals are entitled to bonuses based on how well they execute the business plans of their team, and there are carefully established Key Performance Indicators around that.
Because being a principal in a good firm carries certain expectations, it is not surprising that most principals earn their bonuses, and the bonuses are in most cases approximately the same as base salary…effectively doubling their salary.
In incorporated firms principals hold shares, and earn dividends on those shares if the firm as a whole does well.
Finally, there is real potential in a successful firm for capital growth in share value.
In my client’s case shares are very much in demand internally.
In by far the majority of firms in Australasia by comparison, there is very little generated that can be characterised as genuine bonus after base salary, or as dividends on shareholding (or working capital tied up).
In my experience starting to fix the problem must found in an understanding by principals that their present returns are quite inadequate and can be significantly improved.
It’s very unusual for a firm to ever be able to fix a problem some or all partners don’t recognise exists.
Usually the answers to far better returns are found in excruciatingly obvious areas, and relatively simple changes are needed to change financials outcomes dramatically.
It is quite easy, and not very expensive, for an experienced legal practice consultant to guide principals to large improvements quite quickly.
Heads-up for the day… What are Employees For?
Certainly not to cover their overheads! Employees need to generate you a good margin on the costs of having them.
There are lots of examples of principals forgetting the essentials of the relationship and making arrangements accordingly.
I still regularly see employees “gifted” large proportions of what they bill…knocking out most, if not all, of the margin they should be generating for those who find the work and take all the financial risks.
Today's employed lawyer rates flexibility in working arrangements highly...the seismic shift in gender balance in the Profession is accelerating the need for firms to have good flexible arrangements...but there are many practical things to look out for of course!
Example to demonstrate just one point...Senior lawyer on $120K remuneration requests to drop down from 5 to 4 days/week...and offers to accept four-fifths salary…
The firm saves 20% of $120,000 salary...$24,000...seems logical...equitable...reasonable...
BUT...
The firm loses the opportunity for $76,000 in fee revenue from that fifth day’s work.
Net after salary saving, the employer is $52,000/year worse off to accommodate the lawyer's legitimate lifestyle preferences...
Whoops!
Note that most fixed overheads remain the same...firm continues to pay full practising Certificate and Insurance etc., and still have same Rent, Receptionist, Bookkeeper, Accounting costs, power bill, support staff etc.
Could a part-timer doing the fifth day make up the loss...unlikely even if it were possible to find such a person!
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