Best Practice: Proper compensation and profit margins for Of Counsel attorneys
By John W. Olmstead, MBA, Ph.D, CMC
Q. I am the managing partner in an eight attorney firm in Phoenix. We are contemplating bringing in a senior lawyer as an Of Counsel that wants to gradually wind down his practice. We are thinking of paying him using an eat-what-he-kills approach whereby he would be paid 40% for his personal production (collected working attorney receipts) and 20% for bringing in the client (origination). Thus, if he brought in the client and did all of the work he would get 60% of the fee. What are your thoughts?
A. The approach is fine and I know several law firms that use this approach and these percentages. My concern is with the percentages. Don't forget the overhead. Lets say that he collects $300,000 and that he brought in the business and did all of the work. He would get 60% of $300,000 or $180,000 and the firm would get 40% of $300,000 or $120,000. Typical overhead per lawyer is $100,000 per year or higher. If the overhead is $100,000 there would only be $20,000 profit contribution or 6.6% margin. I believe the firm should make a margin of 25%-30% from associates and Of Counsels.
Examine your overhead. I would suggest 35% on working attorney receipts and 15% for client origination.
You may believe that the overhead consumed is far less that the firm's average overhead per lawyer and that a contribution cost allocation approach allocating only variable/direct costs is more appropriate. However, there are often other costs. I find that many law firms cut themselves short and only cover their overhead leaving very little or no profit margin.
Look over your overhead and determine the profit margin that you desire and go from there.
Click here for our blog on compensation
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC,(www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.