Small firm compensation: Is it worth it?

One of the major challenges for small firms is the compensation it can offer staff. Anecdotally, small firm compensation is typically lower than that of larger firms. Nonetheless, any lawyer — whether employer or employee — assessing proposed compensation must conduct an honest cost-benefits analysis to determine whether it’s worth working at a particular firm, large or small. 

The Associate’s Perspective

Many junior lawyers are faced with the grim reality that not everybody strikes it rich straight out of law school. Starting small firm salaries can be in the range of $30,000 to $40,000, if not lower. Some firms may only be able to offer part-time employment. Other compensation scenarios are based on an “eat-what-you-kill” model, meaning that you get a percentage of the revenue you generate. 

Low compensation may be a tough pill to swallow, particular for those carrying massive student loans or trying to save for a down payment on a house. Moreover, there is a time value to money, meaning that agreeing to a lower salary results in forgoing some compounding effects time has on money invested.   

While small firm compensation may be lower, the non-monetary factors of a particular firm may offset that. The firm’s reputation, the availability of quality lawyers who can offer valuable mentorship, the opportunities for growth and perks such as covering fees and dues, funding for CPD programs or memberships or medical and dental benefits may be offered. There is also the fit between you and the firm to consider, as it might be that the small firm environment is perfect for you.   

As part of the cost-benefits analysis, also consider the long game. While paying off debt is undeniably important, building a solid foundation for your career is also important. If a small firm can assist in building proper career fundamentals, that will pay great dividends in the long run.  

Of course, this is not to mean that one should sell themselves short or stay loyal to a situation where there are dwindling benefits. As such, it is important to conduct the cost-benefits analysis regularly. 

The firm’s perspective

At some point in time, the small firm lawyer will need to put their mind toward hiring staff. This is undoubtedly nerve-wracking as there must be constant and sufficient cash flow to honour wage obligations. Moreover, paying a fair and market-rate compensation while offering attractive non-monetary benefits is necessary to retain competent staff that you like. Further, structuring compensation in a way that incentivizes an associate to achieve goals is necessary to ensure they are not simply a drain on your cash flow. 

With cash flow being a factor, hiring an associate, especially a junior one, can be risky as they may not generate sufficient profits to pay for themselves. At the early stages, the cost of the associate may far outweigh the benefits. 

Like the employee, the employer should regularly conduct an honest cost-benefits analysis for everybody on their team. While costs can be seen in purely financial terms, also consider non-financial factors. Examples include the impact a particular person has on office morale, productivity and other metrics that are important to you. While the associate may not be directly generating profits in their name, they may contribute to an increase in your firm’s profitability by assisting on files, helping manage staff and other aspects of the firm and freeing up your time to focus on higher-value work. This also highlights the importance of keeping track of profitability year over year and setting time aside each year to assess factors that increased or decreased profitability.   

Whether you are an employer or associate, conducting regular cost-benefits analysis of your compensation situation is important to the health of your practice. Ignoring this exercise is a path toward stagnation and higher long-term costs that can undermine your career objectives.