Page 11 - Law Society of Hong Kong MPMC Manual v8 - With checklists (1 March 2018)

Practice Management Course | Unit 2
Financial Management

want to assist clients and say ‘yes’ to nearly every piece of work that comes your
way. Indeed, most client enquiries will be an instant ‘yes’, but practitioners should
consider each client’s characteristics at the outset of each matter.

Building a fee budget
3. Building a fee budget is another aspect of financial management. Budgets serve as
a mechanism to track past performance. Cost overruns or revenue shortfalls may
easily be identified by comparing actual and budgeted outcomes. However, budgets
also perform a crucial incentive function: fee budgets serve to set expectations for
employees. Appropriate fee budgets will provide just the right amount of motivation
for each individual, while maintaining fair and reasonable expectations across the
organisation.

4. There are three methods for building a fee budget:

1. Method 1: A fixed percentage increase on actual fees achieved in the prior year.
2. Method 2: A salary multiplier (e.g. 3 or 4 times salary).
3. Method 3: A formula applied to all fee earners (e.g. hours worked x charge out
rate = fees budget).

5. Method 1 is linked to existing fees income. It applies a fixed percentage increase
to the previous year’s fees income. This could, for example, be a 5% budget
increase applied across the board, but there is no reason why the percentage
increase could not be varied between fee earners, depending on their level of
performance. A fixed percentage across the board puts pressure on high
performers, but does not incentivise non-performers to improve. Following this
method results in higher reliance on high achievers and is more difficult to achieve.
A variable percentage could overcome this problem.

6. Method 2 is linked to salaries. It creates a fees budget that is based on the fee
earner’s salary. It usually provides for a common multiplier to be added to a fee
earner’s salary to make up that person’s fees budget. The multiplier will reflect all
the overhead costs and profit needed to run the firm profitably. For example, a
salary may be multiplied 3 times to produce the fees budget expected from that
person. Solicitors on a higher salary would therefore need to work longer hours, or
be more productive, or do higher-value work to achieve the multiplier, than would
those on a lower salary. This method ties salary directly to fee performance and is
therefore relatively effective at motivating performance.

7. Method 3 is based on calculating a set number of chargeable hours per day. It can
be linked to salaries, with differing charge out rates for each fee earner, depending
on their salary. The firm’s actual rates charged to clients may differ from the
standard charge out rates of fee earners. It may be better to use a blended rate for
each fee earner that approximates the actual overall blended rate that is charged to
the client. Below, is an example of using a formula to calculate a fees budget that is
based on a set number of chargeable hours per day being charged at a blended
charge out rate.

• Calculate the number of chargeable hours per day by multiplying the
number of weeks worked in a year, by the number of hours worked
per week, by the number of hours worked per day. For example:

© The Law Society of Hong Kong (2018) Page 7