Simplifying Your Law Firm’s Rule of Thirds Calculation

Law firm discussing the rule of thirds
With CARET Legal, you can access custom reports that show how each employee is performing and compare their cost of employment to their billable income.

The rule of thirds provides a guideline for law firms to maintain a balanced approach to financial management. It ensures that the firm covers its operating expenses, adequately compensates partners for their work and investment, and retains a portion of profit for future stability and growth.

The Rules:

  • Partner Compensation: One-third of the revenue is allocated for partner compensation.
  • Operating Expenses: One-third of the revenue is allocated towards covering the law firm’s operating expenses.
  • Firm Profit: One-third of the revenue represents the firm’s profit.

(The 3 core rules: employee compensation, basic overhead, firm profit)

Billable Employees 

Deciding how much to pay a new lawyer and managing current employees’ salaries can greatly affect a law firm’s expenses. The money earned from billable employees pays for non-billable ones. To ensure that billable employees are earning three times their salary, you can use custom reports for law practices and follow the “rule of thirds” for law firms. This will help you quickly check that all billable employees are earning enough to cover all three areas evenly.

New Attorney – 5x

New attorneys take longer to complete projects compared to experienced lawyers, but their billing rate is nearly half of a seasoned attorney’s rate. They only need to bill their time to get paid. To make sure they follow the law firm rule of thirds, they need to generate five times their salary.

Rising Talent – 4x

For attorneys that have been with the practice for over a year, supporting client relations and mentioring new lawyers is part of their job and they get a salary increase for doing so. With these additional responsibilities, their billable time may decrease slightly but their billing rate increases. To follow the law firm rule of thirds, they only need to generate four times their salary. 

Seasoned Attorney – 3x

Seasoned attorneys are usually partners or owners of the firm who can bill at a high rate. They earn a higher salary for bringing in new clients for younger attorneys. Because of their tenure and ownership, they are the only billable employees who truly follow the law firm rule of thirds.

Non-Billable Employees

Non-billable employees are essential for the growth and operation of a law firm. Although they don’t generate income directly, they contribute to generating new income opportunities through advertising and answering phone calls. It’s a mistake to include these employees in the compensation third. Instead, they should be categorized as overhead to maintain and visualize the law firm rule of thirds.

  • Marketing: Moving marketing expenses to overhead will help you accurately calculate the return on investment for all marketing expenses, not just pay-per-click, SEO, and website costs.
  • Administrative: If a law firm has an employee who only supports office operations and doesn’t contribute to billable hours, they should be considered an overhead expense for office management.
  • Sales and Intake: If your law firm has an employee whose only job is to make sales calls and handle intake forms, they should be considered an overhead expense and moved to that category.

Visualize Your Thirds

With CARET Legal, you can access custom reports that show how each employee is performing and compare their cost of employment to their billable income. You can categorize each employee, making it easy to spot and correct any mislabeling, such as a receptionist being labeled as a salaried employee in the compensation area.

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