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Split of Collected Fees

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Hi all,

I just came across a firm whose compensation is based on a split of collected fees as opposed to a set salary. Any input? Is this more common than I think it is?

Thanks!

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Very common, especially for smaller firms.  In my experience, salary positions are very difficult and a lot of firms are following this model.  
 

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Anyone shed some light on split ratios? I'm being proposed a 40% of receivables and time billed on receivables and want to know if that's fair and where the heck the rest of the 60% fits in as a cost.

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On 4/12/2019 at 2:53 PM, celli660 said:

Anyone shed some light on split ratios? I'm being proposed a 40% of receivables and time billed on receivables and want to know if that's fair and where the heck the rest of the 60% fits in as a cost.

Let’s break down the math. 

Suppose you’re hoping to make around $100,000 as a first year. That means that you’d have to bring in $250,000 to the firm (100,000/0.4) per year in terms of billings. That works out to about $20,833.33 per month.

As there’s quite a big learning curve and it takes time to see a file through, If you ask me that’s a very big pill to swallow. 

On on the other hand, if they gave you a straight salary of let’s say $90,000 + bonus  (so ideally to get you to that 100 range anyway) based on your billings, they could very easily lose money on you if you’re not performing. 

I would come back to them and ask for either a 60/40 split in your favour, or a straight salary of let’s say $70,000 + 20% commission based on your billings. Offering a lower starting salary but asking for a high commission shows you’re willing to work hard and you’re not just doing the 9-5 and relying on your base. You’re there to work and to earn your money. Then come year two you say ok I proved myself, I’m contributing to the firm. I’d like 85,000 + 20. And so forth. 

Give it a shot!

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Also, 60% isn't purely "cost", the partners also get a cut for bringing in the business for you to work on. 

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I don't get the sense that the OP is terribly engaged in this discussion, but just to add some perspective from reality, the basic rule of thumb in larger firms is 1/3, 1/3, 1/3. This means that 1/3 of the revenue generated by an associate goes into paying that associate, 1/3 goes to paying for everything that supports the associate's work, and 1/3 goes into profit for the firm. Although I do not have any sense this is a hard rule, it at least introduces some reality into this discussion.

So, first concept. It costs a lot of money to run a law firm. If you think you should be pocketing anything near the full amount billed for your services, then you can set yourself up as a sole any time you want. Start paying for your own rent, for your own assistant to answer the phones, for your own website and business cards, and start paying someone to fix those things every time something goes wrong, and you'll quickly see why you don't pocket every dollar that's billed as "your" time. I start to get really aggravated on this topic because there's an unstated set of very privileged and very obnoxious assumptions that go into any suggestion that a lawyer's billings even exclusively reflect that lawyer's work product at all. Do you imagine that the admin assistant supporting "your" work is on the same arrangement? That they collect a percentage for "their" billable time? Of course not - their services are almost never billed for at all. Their work is accounted for within your work. The idea that "your" billings are exclusively yours at all is a fallacy - and a pretty damn arrogant one at that.

Second concept. Your employers aren't running a charity, and the idea captured in Steve's point above that their target goal in employing you is based somehow around the point where they risk losing money is also incredibly far off the mark. No one - no one - hires an associate lawyer to work on files at their firm with the goal of breaking even on their work or of making some trivial profit. Get used to the idea that a meaningful slice of your billings are going to be accounted as profits to the firm and will go into your employers' pockets. If you don't like that, see advice above. Find your own clients, bring in your own book of business, set up your own practice, and keep 100% of whatever's left after expenses. Although see point one, that 100% of what's left after expenses is still a lot less than you may believe. A firm brings in business based on the trust established by the partners and the quality of their work over a long stretch of time. They take care (one would hope) in hiring and supervising associates. All of this has value, which they absolutely do leverage into making a profit off of your work. And again, I get really kind of aggressive any time I detect a hint of "that's not fair!" in any new associate. We're all part of a capitalist, market-driven economy where we are all already "winners" by comparison to most of the workforce. Capitalism is based, all around us, on the idea that the folks providing the capital are entitled to a share (often a big share!) of the productive labour of the people they employ. If this offends you, then look into communism as an alternative. If you think that you alone should be above this reality, then get the hell over yourself!

The reason I am writing all of this is that you are certainly entitled to seek the best employment terms you can bargain for (again - free market!) and you should do so. But you won't be doing yourself any favors if in the course of negotiations you only demonstrate that you are completely ignorant of reality. Working backwards from what you expect to make also isn't a productive tactic. "I figure I'm worth $100,000 a year as a first year associate" (which, btw, is top dollar at a major firm, and not likely to be what anyone is making at a smaller shop) is not the place to start. If you want to know what a 40% split translates to in reality, you should be asking questions like "what rate would you be billing me out at" and "how much work can you guarantee you'll supply me with" and "what is your policy on write-downs" (write-downs are where you do the work, but the firm feels they cannot bill the full hours you are accounting for to the client). Then at least you'll come across like you know what the hell you are talking about, whatever else may come of it.

Anyway, I could write more. But that's a starting point into these discussions, at least.

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3 hours ago, Mycousinsteve said:

Let’s break down the math. 

Suppose you’re hoping to make around $100,000 as a first year. That means that you’d have to bring in $250,000 to the firm (100,000/0.4) per year in terms of billings. That works out to about $20,833.33 per month.

As there’s quite a big learning curve and it takes time to see a file through, If you ask me that’s a very big pill to swallow. 

On on the other hand, if they gave you a straight salary of let’s say $90,000 + bonus  (so ideally to get you to that 100 range anyway) based on your billings, they could very easily lose money on you if you’re not performing.  

I would come back to them and ask for either a 60/40 split in your favour, or a straight salary of let’s say $70,000 + 20% commission based on your billings. Offering a lower starting salary but asking for a high commission shows you’re willing to work hard and you’re not just doing the 9-5 and relying on your base. You’re there to work and to earn your money. Then come year two you say ok I proved myself, I’m contributing to the firm. I’d like 85,000 + 20. And so forth

Give it a shot!

Just for clarity, I know what the firm's billings are and while I gather that a lot of the firm's revenue is generated from the goodwill of the owner (there are only two lawyers, plus me and staff) that if I want to make anywhere near enough money to so much as pay down my loans on the set schedule, that I would need to hustle my own business from basically minute 1. Now, I have other advantages that are unique to me (this is my fifth year with the firm for example) and I know a lot of the clients, and I do a lot of my own work with little to no supervision, but I'm not convinced that a 40% split is reasonable for me.
 

With regards to the response by Diplock, I have been self-employed in a professional service role before and more than understand the rule of thirds. In this case the firm is largely operating on alternative fee structures and very few of our files work on time incurred, so I can't actually turn more hours spent into more receivables for me (or the firm for that matter). What I am concerned about is what the 40% translates into in real dollars vs. what I get for my 60%. Again, having seen the billings I can guarantee that if I did all the work of the firm year over year, I would be pocketing less than a 5th year lock-step employee with a big firm.

 

To better clarify what I am canvassing opinions on:

1. What is a reasonable percentage for accounts and files that I bring in compared to files that are handed to me? Is there a point in differentiating those amounts? What is the value of the goodwill in percentage terms? If I'm going to negotiate an alternative to the currently proposed split, then I need to come up with something that's fair. I'm considering two possible alternatives. One would have 20% going to whoever brings in the account, then the remainder being split equally between me and firm, so if boss hands me all my work for the year, then sure, the 60-40 split stands, but then I'm making 60% on work I'm bringing in the door, or at least 20% on work I bring in that I don't or can't do. The other way I conceived would have tranches or cutoffs, so I would be on a 40-60 for the first 100k, 60-40 on the next 100k, and 80-20 on anything above 200k. At 300k per year of billings that would work out to about 120k going to employer and 180 going to me, but employer is actually taking about 84k in profit (based on cost estimates below), fulfilling that rule of thirds.

2. How much actual cost would be attributable to an associate that doesn't have an assistant? The way that I cracked down the numbers, it looks like it's about 6k per year for basic liability insurance, 4k/year for dues, another 2k/year for excess e&o coverage, and then about 2k per month for attributable share of office expenses. So that puts me at $36k for a year in terms of raw cost to employer. Does that seem right?

3. If I'm on a pure split arrangement, should I then still be subject to a fixed schedule and how do we address non-billable hours? Over the past year I have spent a lot of time making a website, developing forms, writing blog posts, etc. but once I'm on a percentage, why would I spend time doing that for employer for free? Do people on splits have any basis for how to compensate for those hours?

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48 minutes ago, celli660 said:

1. What is a reasonable percentage for accounts and files that I bring in compared to files that are handed to me? Is there a point in differentiating those amounts? What is the value of the goodwill in percentage terms? If I'm going to negotiate an alternative to the currently proposed split, then I need to come up with something that's fair. I'm considering two possible alternatives. One would have 20% going to whoever brings in the account, then the remainder being split equally between me and firm, so if boss hands me all my work for the year, then sure, the 60-40 split stands, but then I'm making 60% on work I'm bringing in the door, or at least 20% on work I bring in that I don't or can't do. The other way I conceived would have tranches or cutoffs, so I would be on a 40-60 for the first 100k, 60-40 on the next 100k, and 80-20 on anything above 200k. At 300k per year of billings that would work out to about 120k going to employer and 180 going to me, but employer is actually taking about 84k in profit (based on cost estimates below), fulfilling that rule of thirds.

Negotiating from a 40-60 split to:

  1. 20% flat rate on accounts brought in, plus a 50-50 split of the remainder; or
  2. A tranched system that has you making 60-40 (and your employer only making 28% post-expenses

seems incredibly difficult.

That's particularly true under your tranched model, where you employer would only stand to make 24k if you bill 100k, 64k if you bill 200k, and 84k if you bill 300k. Just from a business standpoint, it doesn't make much sense to give you more work after a certain point. If office expenses stay stable, your employer would make more money hiring a second lawyer and giving you both 150k in work, since they would make 88k off the two of you (compared to only 84k for you alone). 

I've never been a business owner, but that's just my gut reaction to your proposals. 

Edited by BlockedQuebecois
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1 hour ago, celli660 said:

Just for clarity, I know what the firm's billings are and while I gather that a lot of the firm's revenue is generated from the goodwill of the owner (there are only two lawyers, plus me and staff) that if I want to make anywhere near enough money to so much as pay down my loans on the set schedule, that I would need to hustle my own business from basically minute 1. Now, I have other advantages that are unique to me (this is my fifth year with the firm for example) and I know a lot of the clients, and I do a lot of my own work with little to no supervision, but I'm not convinced that a 40% split is reasonable for me.
 

With regards to the response by Diplock, I have been self-employed in a professional service role before and more than understand the rule of thirds. In this case the firm is largely operating on alternative fee structures and very few of our files work on time incurred, so I can't actually turn more hours spent into more receivables for me (or the firm for that matter). What I am concerned about is what the 40% translates into in real dollars vs. what I get for my 60%. Again, having seen the billings I can guarantee that if I did all the work of the firm year over year, I would be pocketing less than a 5th year lock-step employee with a big firm.

 

To better clarify what I am canvassing opinions on:

1. What is a reasonable percentage for accounts and files that I bring in compared to files that are handed to me? Is there a point in differentiating those amounts? What is the value of the goodwill in percentage terms? If I'm going to negotiate an alternative to the currently proposed split, then I need to come up with something that's fair. I'm considering two possible alternatives. One would have 20% going to whoever brings in the account, then the remainder being split equally between me and firm, so if boss hands me all my work for the year, then sure, the 60-40 split stands, but then I'm making 60% on work I'm bringing in the door, or at least 20% on work I bring in that I don't or can't do. The other way I conceived would have tranches or cutoffs, so I would be on a 40-60 for the first 100k, 60-40 on the next 100k, and 80-20 on anything above 200k. At 300k per year of billings that would work out to about 120k going to employer and 180 going to me, but employer is actually taking about 84k in profit (based on cost estimates below), fulfilling that rule of thirds.

2. How much actual cost would be attributable to an associate that doesn't have an assistant? The way that I cracked down the numbers, it looks like it's about 6k per year for basic liability insurance, 4k/year for dues, another 2k/year for excess e&o coverage, and then about 2k per month for attributable share of office expenses. So that puts me at $36k for a year in terms of raw cost to employer. Does that seem right?

3. If I'm on a pure split arrangement, should I then still be subject to a fixed schedule and how do we address non-billable hours? Over the past year I have spent a lot of time making a website, developing forms, writing blog posts, etc. but once I'm on a percentage, why would I spend time doing that for employer for free? Do people on splits have any basis for how to compensate for those hours?

Re: 1 - I have heard of any of those (split gets smaller in your favour with higher billings, you get to keep a bigger percentage of files you find, etc.) Depends on your boss and their expenses etc.

2: Depends. Rent, phones, photocopier, fax, office supplies, insurance/license fees, property insurance, etc. 2k/month for office expenses seems low to me but it depends on office size and location.

3: I would not do those types of things on a non-billable basis for someone else’s office. I would only do it for myself if I were a sole. For a boss, only if they reasonably compensate me. 

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40% is low. 50% is normal. But all depends on the quality of work. If you’re in a specialized area like aviation or tax law where the firm brings in great clients who you can bill all day for then 40% may be good, but if you’re bringing in your own clients then you might as well go solo if they won’t do a reasonable %.

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2 minutes ago, TrialPrep said:

40% is low. 50% is normal. But all depends on the quality of work. If you’re in a specialized area like aviation or tax law where the firm brings in great clients who you can bill all day for then 40% may be good, but if you’re bringing in your own clients then you might as well go solo if they won’t do a reasonable %.

Firm is very unspecialised, basically like working for a solo in a small town.

 

8 minutes ago, providence said:

Re: 1 - I have heard of any of those (split gets smaller in your favour with higher billings, you get to keep a bigger percentage of files you find, etc.) Depends on your boss and their expenses etc.

2: Depends. Rent, phones, photocopier, fax, office supplies, insurance/license fees, property insurance, etc. 2k/month for office expenses seems low to me but it depends on office size and location.

3: I would not do those types of things on a non-billable basis for someone else’s office. I would only do it for myself if I were a sole. For a boss, only if they reasonably compensate me.  

On 2, I'm just attributing a ratio to me based on 10k per month for the office divided by 5 staff. Perhaps that should be more with if accounting for the receptionist, but I'm also pulling the phone to pick up for people when nobody else is around so I figure that would even out.

With respect to three, if I don't do it then it won't get done and I prefer to have those things for at least the veneer of professionalism it brings.

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17 minutes ago, celli660 said:

Firm is very unspecialised, basically like working for a solo in a small town.

 

On 2, I'm just attributing a ratio to me based on 10k per month for the office divided by 5 staff. Perhaps that should be more with if accounting for the receptionist, but I'm also pulling the phone to pick up for people when nobody else is around so I figure that would even out.

With respect to three, if I don't do it then it won't get done and I prefer to have those things for at least the veneer of professionalism it brings.

It sounds to me like you’re ready to go solo 🙂

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Thanks for your input everyone! The firm that I'm considering is offering 50% and said that they have a lot of existing clients that they would transfer over to me (I would also look into bringing in my own clients; NOTE: I am VERY junior so this would take some time).

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On 4/20/2019 at 4:03 PM, celli660 said:

Firm is very unspecialised, basically like working for a solo in a small town.

 

On 2, I'm just attributing a ratio to me based on 10k per month for the office divided by 5 staff. Perhaps that should be more with if accounting for the receptionist, but I'm also pulling the phone to pick up for people when nobody else is around so I figure that would even out.

With respect to three, if I don't do it then it won't get done and I prefer to have those things for at least the veneer of professionalism it brings.

In an earlier post you said there are 2 lawyers plus you. Why are you dividing office overhead by 5? If you are portioning out overhead to individuals you would only do so to the individuals that are bringing in billings. The other 2 individuals are support staff and are part of the overhead. 

 

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1 hour ago, OWH said:

In an earlier post you said there are 2 lawyers plus you. Why are you dividing office overhead by 5? If you are portioning out overhead to individuals you would only do so to the individuals that are bringing in billings. The other 2 individuals are support staff and are part of the overhead. 

 

Yeah good question. I'm dividing by five for rent, utilities, insurance, etc since I do not get any support from the conveyancer and I do substantial amounts of the receptionist's work in addition to my own. I acknowledge in that quote that perhaps the receptionist's salary should be factored in. If it would make you contribute more to the conversation then we could attribute an additional $1k/month for my share of the receptionist's salary.

 

On 4/20/2019 at 12:58 PM, BlockedQuebecois said:

Negotiating from a 40-60 split to:

  1. 20% flat rate on accounts brought in, plus a 50-50 split of the remainder; or
  2. A tranched system that has you making 60-40 (and your employer only making 28% post-expenses

seems incredibly difficult.

That's particularly true under your tranched model, where you employer would only stand to make 24k if you bill 100k, 64k if you bill 200k, and 84k if you bill 300k. Just from a business standpoint, it doesn't make much sense to give you more work after a certain point. If office expenses stay stable, your employer would make more money hiring a second lawyer and giving you both 150k in work, since they would make 88k off the two of you (compared to only 84k for you alone). 

I've never been a business owner, but that's just my gut reaction to your proposals. 

This was a really good point that I thought about for a while... I don't think my boss has 300k in work to give out, so that's a non-start position. I would imagine that it's more like my boss has 150-200k to give out and if I was billing 300k and he said "now that you're doing 150/year of your own business, I'm going to hire another associate so I can make an extra 4k on the work I would normally give you" I would just leave. So my concern in all this is how to properly balance the cost to me of needing to get my own business as a very junior lawyer (I'm just starting articles) against the value my employer receives from me obtaining my own work.

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My $0.02

Yes, earning a percentage of your billings is incredibly common.  But when negotiating, see if you can negotiate some kind of guaranteed salary draw, to try to protect you against any individual bad month.  So you're always guaranteed some base rate, then your salary will be topped up at the end of each billing period to equal your 50%.  Of course if you consistently don't even earn your salary draw you won't long have a job, but it gives at least some short-term protection.

Or at least that was the deal I had once upon a time.

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Random long time lurker, first time poster here.

Aside from echoing MP's suggestion that you try to arrange for a guaranteed draw of some kind; I would recommend nailing down the specifics of the arrangement, as, at least in my experience, the people at small/rural law offices can be shockingly handshake based for lawyers.

What are the supplies, support staff, software, resources, subscriptions, memberships, advertising, etc. that the percentage you pay does/does not cover; is the firm remitting source deductions for you as an employer, or is it their intention to treat you (or at least to try to treat you) as an independent contractor, etc.

And in the case of that last point, seek appropriate professional advice about whether you would qualify as an independent contractor, and if so are you set up properly in terms of income and sales taxes applicable to your billings.

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