We are almost at the end of our discussion with regard to the fourth area of the five areas that make up every business in the world which is the area of “billing.” As you know, the other four areas are: “Clients” or “customers”; “Administration”; “Getting the work done”; and “Collecting.”

Last week we continued speaking about the Lotus form we use in our office to keep track of per biller time in our firm entitled “Total Production and Total Paid - Month, Year.” You will again see the form set out in this column.

This week we will continue where we left off last week:

1. Balance of Yearly Net Salary (Deficit): This number is fairly self explanatory in that it gives you a running total of exactly where a person’s yearly net salary is at on a month to month basis throughout a particular year. Obviously, in some cases the individual might be running a deficit, because you have paid them more money on their draw, than they have actually earned. Alternatively, they could be making more money than they have been making on their draw, and this would be a positive number that needs to be paid to that individual. This balance can be looked at on a quarterly basis and be reconciled with the individual. If they are not keeping up with regard to their draw, their draw can be cut back. If they are keeping up with their draw as well as the money they need to pay taxes, you can make quarterly distributions. Obviously, at the end of the year, you need to make adjustments with regard to this person’s draw so that their next year’s draw more accurately reflects exactly what they have brought into the firm. Hopefully, this balance of yearly net salary (deficit) will always be a positive, and you have set up the draws in such a way that people are always taking less of a draw than they are actually earning, and then you can reconcile them either quarterly or at the end of the year. If you have a balance of yearly net salary (deficit) that needs to be carried over to the next year, this can be done with great ease. Eventually, you are either going to have to adjust the persons draw or something more drastic, if this person never earns enough for their draw and their taxes. The concept here is that if a person runs a deficit, when a personal injury case settles and all of the sudden they have a very large amount of money that they are owed in a given year, you need to look back and see what type of deficit they were running previously, so that this individual frankly does not get overpaid. Sometimes, the smart thing to do is to simply forget about ongoing deficits if the reason that the person runs the deficit is not fault of their own. Not every person who takes a draw should stand 100% of the risk of non-collection. Obviously, paralegals stand almost no risk of non-collection versus lawyers. The reason for keeping all of these numbers on an ongoing basis is so people can see what it is that they are actually earning for the law firm. I have found that this really cuts down on the amount of sharp discussions about compensation. The bottom line still is that if people are being reasonably compensated for reasonable work, everyone will be happy. I have found that the only time people seem to get upset, is when they are being underpaid. I have never once ever had anyone be upset that they were being overpaid!

2. Cumulative Production: This is the amount of cumulative production that an individual has on a year to date basis.

3. Cumulative Earned Salary: This is the amount of running salary that an individual has earned to date that is determined from 33 1/3% of their production plus 15% of any responsible attorney time allocated to them.

4. Net Cumulative Draw/Salary Taken (with salary deducts): This number is the amount of money that has actually been taken out of the firm on a yearly basis. We also allow individuals to do salary deducts, which are items that are deductible to the firm and not taxable to the individual people in the firm, but none the less have some benefit to that individual. The amount of net cumulative salary-draw/salary-taken is self explanatory because that is the actual amount of money that someone has received. Salary deducts are added to that so

it can be determined what benefit an individual might have gotten from the firm even thought it might not have been in the nature of actual salary.

5. Salary Due: This is the number that is put down if there is any additional salary owed to an individual because they have actually taken less money than they have actually earned.

6. Total Production: This number is the running total of the actual production of an individual in our firm over the total time they have been with our firm.

7. Total Responsible Attorney: This again is the actual amount of money that a particular individual has actually brought in business to the firm over the totality of the time they have been with our firm

8. Total Earned Salary (Benefit): This is the total salary that an individual has earned over the time they have been with our firm including salary deducts.

9. Percent of Production to Total Earned: This is the number of how much money an individual has been able to take out of the firm in relationship to the actual amount

of money that an individual has taken out of the firm in terms of salary (benefit), which includes salary deducts, which includes how much they have actually produced for the firm. I think you would find it interesting to know that under the formula that we have, that the people who are supposed to be taking out either 331/3, because that’s only their production, are only taking out 33 1/3%. Also, those who are taking out 33 1/3% plus some number with regard to the 15% that makes up the responsible attorney number, are also taking out some number higher than 33 1/3%, but no one is taking out 48 1/3% because no one in the firm is working on only their own business except for the owners of the firm. The other fascinating factor is that the owners of the firm can take out almost 80% of what they produce for the firm from their own efforts, because of the percentage they are able to get off of the business that they produce for other people to do.

What all of the above really says is “Who’s producing what, and how much are they getting paid?” and “Are they being underpaid or overpaid?” Obviously this is done in every firm every year by some type of method to determine what someone’s next year salary is going to be. Frankly salaries never have much appeal to me, because they are always fixed. Those people that don’t think they are earning enough, are disgruntled. Those people who are earning too much are happy, but everybody else is disgruntled because they are happy. If you go on some type of a merit system, it seems to me that there are fewer disgruntled people.

Under the system in our office, if someone wants a raise, we simply look if we can raise their hourly rates, raise the percentage that they bill that we can collect, or simply have them work more hours. There is a direct correlation between people’s efforts and how much they make. This is a good thing!

Another interesting way to look at this, would be to look at it from a point of view that you are a single lawyer in an office by yourself. If you have normal overhead, and could figure out a way to take home 80% of what you produce, it would be nirvana. By having other individuals available to work on work that you can produce, you can often times make more money on the 15% of the responsible attorney time allocation than you can on the 33 1/3% of the production allocation that you get. Mathematically, it’s quite simple that if you get 33 1/3% of the smaller number, that number can be less than 15% of a substantially bigger number. If you are a business getter, and a dollar producer, when you add those two numbers together, you can actually make a pretty good salary.

Next week we are going to talk about the last schedules that we have that take all of the other Lotus schedules that we have and show these numbers on a year to year basis instead of on a month to month basis. If you are going to keep year end totals, you should be comparing year end totals to previous year end totals. I think you will find some of my observations with regard to these last schedules quite interesting, and that will bring us to the end of our comments on the fourth area that makes up every business in the world, that being “billing.”

Talk to you next week.