How Much Should I Pay for a Billable Employee?

One of the most challenging aspects of managing a law firm is finding the right balance between hiring the necessary number of staff members, including attorneys and paralegals and ensuring the firm can afford their legal services. Law firms often grapple with questions like:

  • Can I afford to hire a new attorney or paralegal?
  • How do I set a reasonable fee for my staff that allows the firm to profit?
  • Am I overpaying or underpaying my legal professionals?

The solution involves hiring the necessary employees and creating a compensation plan that is profitable for both the firm and the employees. Of course, that is easier said than done. So how do you figure out what you can pay a billable person?

Salary Math for Billable Employees

Our team at Cathedral Capital assisted a law firm in the United States with its billing practices. The firm was led by an attorney named Lauren. Her firm had been growing, and she had hired several attorneys to take on the extra cases. She employed several strategies to determine the hourly rate and salaries for her team, aiming to optimize billable paralegal work and ensure fair compensation for all legal work done by her staff. Lauren’s strategy included understanding the market rate for paralegal services, legal research, and substantive legal work. However, she encountered challenges with her billing rate and managing non-billable hours, affecting her firm’s profitability. 

Every time she hired a new attorney, she would bump up their salary slightly from their last employer. It was part of her recruitment strategy. One day, she was hiring a new attorney – a baby attorney – without a salary history. So, to figure out what to pay this new attorney, she asked other firms what they paid their baby attorneys and then offered this new employee essentially the average of their answers. To her, it seemed like these strategies of hers were working. But she soon realized that she wasn’t making the kind of money she expected to make. Her attorneys were not bringing in the revenue that she expected, and the culprit looked to be her billing. She was frequently using more money than she wanted to to cover the overhead costs.

The Problem: Salary Not Designed Around Her Firm

We have a very easy payroll math here at CathCap. Exactly 1/3rd of what gets billed, in total, should go to payroll. Not 50%. Not 40%. Only 33.3% of all billing should go to payroll – and that includes non-billable employees, like receptionists and legal assistants. If you’re spending more than 33% of your payroll, your payroll needs to change. This approach helps manage overhead costs effectively and ensures that billing practices, including alternative fee arrangements like flat fees or different rates for paralegal billing versus attorney fees, are sustainable.

In order to do that, we needed to design a compensation plan for the baby attorney that covered not only his salary but also the salaries of non-billable staff that were spent on other forms of overhead, like the time the receptionist spent on his work.

The Solution: Match

To address the challenges faced by Lauren’s firm, we recommended a compensation plan that considers the hourly basis for billable work. This is how we go about creating this compensation plan. First, we multiply their anticipated billable hours by their billing rate. Their billable goal was 1200 hours and their billing rate was $300, so you get an estimated $360,000.

Now, this wasn’t far off from Lauren’s numbers. But here’s where Lauren made her biggest mistake. The average law firm only collects somewhere between 75% and 80% of what they bill. So, rather than base salary off that $360,000, you have to take 75% of that number – $270,000. That is the amount you expect to collect.

In addition, one area in which Lauren made a mistake was in how she defined payroll. Payroll is not just salary. It is also bonuses, taxes, 401K, health insurance – any benefits that she offered her employees. That 33% number has to include all of those things, which means that the actual salaries are typically much less than that 33%.

The Three to Five Multiple

If you want to be even more specific, you can also go a step further if you want, and determine the salary of your employees by what’s known as the 3 to 5 multiple. In a law firm, you typically have three types of attorneys:

  • Finders
  • Minders
  • Grinders

Depending on the type of attorney they are, they are expected to bring in an amount equal to 3x, 4x, or 5x their billable rate.

Infographic showing the 3 types of attorneys.

“Finders” tend to be the more experienced attorneys. While they have billable hours, a large portion of their work is also spent finding new clients. That means that they don’t spend quite as much time billing, but their higher rates and ability to bring in new clientele make them worth it. They’re going to have a 3x multiple – meaning, they should bring in a total revenue that is 3x their payroll.

Next is the “Minders.” Minders are the ones that tend to take on the clients that the Finders brought back. Their job consists of client management, training some of the younger attorneys, and spending their time on other tasks in the firm. But a lot of their time is also spent on billable tasks. “Minders” should bring in about 4x of their payroll.

Finally, we have the “Grinders.” These are usually the younger attorneys. They don’t manage clients as much. They don’t find new clients. What they do is grind – they do the work. The vast majority of their time is spent hard at work doing billable and clerical tasks. Grinders do a lot of billable work. Often they do as much as 1400 hours. So here’s how you can determine their compensation:

Say they’re going to bill at $300 an hour. That’s a total of $420,000. If you collect, say, 80% typically at your firm, that’s $336,000. Finally, since they’re grinders, they’re a 5x multiple. Take $336,000, divide it by 5, and you get $67,000. That means you should be spending $67,000 total on the young attorney’s payroll. Keep in mind, that’s their entire payroll, including taxes, insurance, benefits, and salary. In the end, the baby attorney is probably looking at a salary of about $55,000.

(Note: You can also use the same math to determine if your other attorneys are overpaid or underpaid)

Get Help and Learn More With Cathcap

Determining how much to pay, when you can hire, how much you should be profiting, and more, can seem a bit challenging at first. But once you’ve implemented a system into your firm, it becomes an easy process that you can use to manage all your payroll practices. By focusing on efficient billing practices, reasonable fee structures, and effective management of billable and non-billable hours, law firms can optimize their payroll and ensure profitability. Whether through hiring qualified paralegals, implementing certificate programs for ongoing education, or adopting alternative billing structures, the goal is to create a sustainable and profitable legal practice. For law firms looking to enhance their billing and payroll systems, Cathcap offers resources and personalized support from experienced financial professionals. Discover how to manage your legal fees, optimize your billing rate, and create a more profitable law firm by scheduling a consultation with our team. Don’t wait to transform your firm’s financial future; contact Cathcap today and take the first step towards sustainable growth and success. Learn more

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