How Much Law Firm Owners Make
According to multiple credible law surveys, the national average salary for a law firm owner in the United States varies widely based on several factors. The average reported 2019 annual salary for law firm owners across the country was reported to be $195,000. However, this number should be understood as a broad example of earnings and may not be specific to owners of solo and small law firms. The height of earnings for law firm owners in 2019 was more than $700,000, according to the credible surveys. On the other hand, some law owners nationally reported an annual salary of just $50,000. One of the single biggest factors that may influence law firm owner earnings is widely seen as being law firm size. Based on the legal salaries surveys, the average income for law firm owners within a large firm (250+ lawyers) was $276,000 . Conversely, the average income for an owner in a small firm (2-25 lawyers) was $118,000. Location is possibly the single most notable factor when evaluating law owner earnings. National averages are just that: averages. This means that the numbers reflect many high and low salaries which together produce an overall average. Due to the differences in salary fluctuations based on location, large corporations are less likely to see massive swings in compensation due to location but solo and smaller firms cannot avoid these likely swings. The highest law firm owner salaries in the country have been found in New York City with an overall average of $263,710. The top 5 states for law firm owner compensation were: Law firm owners in Pennsylvania ($174,625), Illinois ($168,077), and New Jersey ($161,455) also receive respectable compensation, according to the law owner income surveys.
What Affects the Pay of Law Firm Owners
Various factors influence how much a law firm owner can reasonably expect to earn, including:
Years of Experience: As with any profession, the longer you’ve been in the field, the more likely you are to be paid a higher salary. Generally speaking, you can expect an increase with your level of experience. At the beginning of your career, you may not be paid as much, but experience opens opportunities for promotions and salary increases.
Firm Reputation: The larger the firm and the better its reputation, the higher the salary you will likely earn. Larger firms usually have more clients and a stronger financial position, translating to higher compensation.
Client Base: The types of clients that a firm has may impact your salary as a firm owner. Clients can include corporations, partnerships, people or a mix of all three. If your client base is strong it can lead to a higher salary than that of other firm owners.
Economic Conditions: The local economy can also impact the salary you receive. A weak economy can mean fewer clients, which in turn impacts your salary.
How Do Law Firm Owner Wages Compare to Other Types of Firms?
As a law firm owner, you need to understand that the type of law you practice can have a significant impact on your salary. For example, corporate law tends to pay significantly better than other legal fields, and attorneys in corporate firms earn nearly three times more. A corporate lawyer’s salary is generally reflective of the large capital corporations they handle. The larger the client and the larger the cases they manage, the more the fees will be and therefore the more the salary will climb as well.
Each type of law is unique, however, meaning that not all attorneys will have the same salary expectations. For instance, personal injury lawyers can make a decent living, but nowhere near the salary of a corporate attorney. The salary range will depend largely on the size of the injury award the client receives. Personal injury attorneys who see a lot of case-winning verdicts will likely have a combined gross income in the six figures. Criminal defence lawyers, on the other hand, typically don’t see nearly as high of an income per case. As such, they often need to take on several cases just to net the typical six-figure salary. In smaller firms, these attorneys can make as little as 70% less than their corporate counterparts.
The Impact of the Structure of Their Firm
How a law firm is owned will play a vital role in determining how much lawyers earn. With sole proprietorships, there are two choices: (1) all net income to the lawyer-owner; and (2) reasonable compensation plus payments by the firm for expenses, etc. Society of Financial Service Professionals, Valuation of a Law Firm After Death or Dissolution, Journal of Financial Service Professionals. In a two-owner sole proprietorship, the lawyer-owners would likely have equal ownership interests and receive equal profits distributions each month. If not sole proprietorships, law firms are organized as partnerships, limited liability companies or corporations.
For partnerships, there are three major types: purely "equal" (or fixed percentage) distribution partnerships, salary-based partnerships and hybrid partnerships. Id. In pure equal partnerships, all owners would receive equally-sized monthly distributions. An example of a salary-based partnership occurs when one owner is paid a salary based on specific criteria, such as hours worked and clients billed, and the net profits are then distributed equally. An example of a hybrid partnership may occur when one owner is paid a salary, the other is given a fixed percentage of net profits and the remaining net profits are equally distributed. Compensation packages could be modified by contractual arrangement between the partners.
In general, transfer of ownership from older lawyers into younger lawyers is accomplished through a combination of retaining existing equity interests and purchasing new equity interests. See Law Firms Unlimited, Valuation of Law Firms, The CPA Journal; Ahn, Lars, Equity Ownership in Professional Service Firms, Journal of Accountancy. One of the rewards for equity ownership is being able to share in distributions of the firm’s profits in varying amounts each year, depending on the income and expenses of the firm. As a firm’s profitability increases, its ability to distribute profits to the equity owners also increases . For a firm with a fixed percentage distribution scheme, the equity owners are assured that their equity interests will continue to be compensated on a relative basis regardless of the level of the firm’s profitability. For a non-fixed percentage scheme, the monthly compensation may vary depending on the amount of the firm’s net profits.
Sole proprietorships can start off as sole practitioners and grow into partnerships without difficulty because, regardless of branding, clients tend to associate attorneys with a law firm name rather than individuals within the firm. Websites, business cards, marketing materials and bar association directories tend to highlight firm names rather than individuals. Moreover, there tends to be a psychological component to clients being willing to remain their attorney’s client regardless of the firm’s structure. For example, if a sole proprietor eventually becomes the founding partner of a law firm with ten or more lawyers, clients that had been with the sole proprietor would generally continue to use the firm and would not question who were the attorneys that would handle their cases. Thus, once a law firm’s reputation is established, clients are less likely to be concerned about the firm’s structure.
A firm’s compensation structure can significantly affect its profitability and, thus, value. The net profits of a law firm under fixed percentage distributions could be significantly less than the expected net profit of an alternative non-fixed percentage compensation arrangement. Since desired profitability is the end goal of operating a firm, compensation structures that leave more net profits to the owners are desired. Additionally, if the standard becomes fixed percentage compensation arrangements, greater pressure will occur to operate with a lean overhead structure. Such a lean structure, with higher net profits as the end result, becomes a high sell factor for strategic buyers or financial investors.
How Law Firm Owners Enhance Their Compensation
To increase law firm owner salary, there are three primary strategies to focus on: expanding services, improving operational efficiency, and investing in marketing:
Expanding Services: Some law groups increase revenue by offering additional legal services to their clients. A law firm that’s primarily a personal injury practice may add business law services to the offerings.
Improving Operational Efficiency: Analyzing the law practice and continually looking for ways to improve efficiency can boost revenues. This can be done by consolidating redundant tasks or streamlining operations.
Investing in Marketing: Marketing is a crucial strategy for increasing revenues. This may include increasing advertising efforts to increase the number of new clients the firm sees.
Considerations and Challenges for Law Firm Owners
Common law firm owner challenges mainly fall into five categories: market competition (e.g., in-house counsel and accounting and consulting firms), managing cash flow and profit margins, managing overhead, setting a sound compensation strategy, and the selling of the law firm.
Fusion Factor is a measure of the strength of the firm’s brand in the marketplace, and it is typically assessed by level of public knowledge of the firm, the market perception of the firm, how the firm is viewed by prospects, and the firm’s success in attracting legal talent. Fusion Factor also involves organic growth (i.e., revenue growth based on retained business) and lateral growth (i.e., revenue growth generated by new attorney hires, customers, and markets). A high Fusion Factor can yield a higher salary the longer the law firm does business. Conversely, a high Fusion Factor can create increased expectations from outsiders that the firm must meet over time. If not handled effectively, a high Fusion Factor can lead to market perceptions that the law firm is arrogant or aloof.
Managing a law firm’s balance sheet may be the most critical task for any law firm owner. Arguably this is more critical for a law firm than a commercial enterprise, since the law firm does not necessarily have the allure of hard assets. However, any resource—human, intellectual, capital, or otherwise—that is put into the law firm IP must be capable of generating sufficient income to justify the cost. Otherwise, the firm loses money.
Price normalization was made necessary by the impact of the Great Recession. Leading up to that event, demand for legal services outpaced supply , leading to rising fees. However, these demand levels were not sustainable. As a result, law firm owners have had to lower billable hours or reduce rates in order to retain clients (especially those that had their in-house counsel perform the work the law firm used to do). More recently, some law firm owners have even gone so far as to unbundle services by moving some work to less expensive providers. Even though many associate and non-equity partners have experienced aggressive hours reductions as well as reduced compensation, this is nevertheless one of the most difficult challenges law firm owners face.
While growth is an important goal, it comes with a cost. The more specific you are about your capabilities and your capital investment in both human and intellectual resources, the greater the chances of success. But operational discipline is also important, and while managing overhead is also costly, any law firm owner must have a well thought out plan for managing overhead. Sustainable, meaningful growth can be achieved by observing the law of diminishing returns: any expenditure, no matter how small, will add to overhead that likely will diminish productivity.
Executive compensation is typically the result of contract negotiations and discussions about performance versus pay level. However, as a law firm’s vision, organizational objectives, incentives, and rewards systems become more complex, so too do its compensation strategies. As a law firm grows, it must re-engineer its compensation strategy to link more closely to its long-term strategic plan rather than just take it one year at a time.