This article is designed to create discussion around the budget-setting process and issues surrounding bonus compensation schemes.
This article is designed to create discussion around the budget-setting process and issues surrounding bonus compensation schemes. Does one size fit all? Read on to discover the traditional approach and some reasons why the setting of a goal may not always deliver the intended result.
Model Rule 1.5 of the American Bar Association states “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee”. Rule 172 of the Legal Profession Uniform Law (NSW & VIC and from 1 July 2020, WA) states “A law practice must, in charging legal costs, charges costs that are no more than fair and reasonable”. The Solicitors Regulation Authority Rule 1.6 specifies a UK lawyer must “only enter into fee agreements …suitable for the client’s needs and take account of the client’s best interests.” Seeing a theme here?
It is all about disclosure, transparency and fairness. So far so good, give a lawyer a certain number of matters to run, sufficient information to determine fees and we can probably ballpark a realistic fee budget. How then do we translate that into a target time budget and provide some motivation to meet it?
The Traditional Model – Multiple of Salary
3.5 times salary - an easy but lazy calculation that has resisted change other than being 3 times in some practices and 4 in others. Applied against 2 year out and 5 year out grads, neatly divided by 12 and there is your monthly target regardless the number of bank holidays or whether President’s weekend or the Easter/ANZAC combo necessitates a few 11 hour days every April. As a model to be rolled out across the multi-disciplinary practice it does raise some questions.
How is it equitable that the property lawyer, running fixed-fee loss-leader cases can have a comparable budget to the personal injury specialist offering contingent-on-success charging? Answer: they can’t.
In larger practices, other variables intrude. Family law might be the monsoonal rain core to the overall profitability of a practice while property services are a divergent stream either referred elsewhere or retained and performed seamlessly for clients at a discounted rate. A rate that if viewed as an ancillary service needs to be seen in that light, perhaps worth more than the very reasonable fee charged. Similarly, where construction and development work thrives litigation is often sure to follow – balancing the budgets across different areas of law that are actually complimentary is difficult to boil down to a simple multiple equitable to the fee earners concerned.
Budgets as minimum acceptable performance
Every fee earner working in a professional service environment needs to have a sense of what baseline performance is however good firm management dictates (or hopes) they will always seek to exceed it. Career progression is generally not achieved by turning in no more than minimum acceptable performance. The question here is do budgets act as a limitation on performance for some individuals? Some practices have discovered that removing fee budgets and encouraging a focus on output quality will support higher charge out rates over time and create fee earner engagement.
Multiple Plus Bonus
“Have we got a deal for you: collect 3.5x your salary and we will pay you 25% of whatever the excess is.” Sounds fine, but don’t mind me for checking on the financial bona fides of this pile of cases you have just assigned to me. Lawyers do not work for free (mostly), but the practice of law is often quite different from other professional services providers. Accountants and bookkeepers might charge by the hour, routinely filing taxes or producing financials. But discounting time or performing non-billable research is significantly rarer. And for a lawyer, the very nature of representing clients who may be facing financial difficulty or an outcome contingent on the decision of a court can make the collection of that fee no certain thing.
Finding the Grind
Many firms have their grinders, finders and minders. It’s pretty easy to imagine the grinder diligently hitting that target if the finder is making enough rain. Pity the poor minder though – stuck with trying to make budget while attending to various firm administrative takes like, managing the actual practice.
One Boston firm tried to resolve this dilemma long ago and the above terms belong to them.
Here’s how it works:
10% of the receipts are paid to the Finder, 20% to the Minders and 60% to the Grinders. The remaining 10% is discretionary. Simple? Perhaps the Minders need to ensure there are more Grinders than Finders. Clearly this is not a set-and-forget regime: only continual annual review could hope to ensure the scheme remains perpetual and that the ratio of participants remains equitable.
Eat what you kill
This is ultimate division of a practice into cost-centers: individual partners or department heads run and bear the cost allocation of their teams, splitting a share of the admin and other resource costs. They set their own rates and charge their own fees and whatever is left over after expenses belongs to them. Drawbacks include the inequity issues of shared resource allocation and likelihood of creating barriers, competition and disharmony between different teams.
Often no one-size-fits-all scheme applies. Every practice is different: the team of property attorneys well-fed by a locked-in cadre of developers might expect a level of consistent income. The generalist firm whose property division is seen as more of a service against the good name built in family law will find it measurably harder to maintain an equitable budget target and incentive scheme.
Are bonus schemes actually demotivational?
Sales; stockbroking; real estate: industries that typically offer very low baseline salaries and very high bonus/commission packages. While it can be argued brokers do spend time researching investment strategies and agents chasing buyers and sellers, both are generally transactional businesses and far removed from some types of law where diligent medium and long term effort results in success. In short: law firm compensation packages don’t always translate well to bonus schemes.
All too often firms attempt to introduce such schemes under what amounts to a ‘collective bargaining’ agreement but unfortunately ends up anything but. Within a multi-disciplinary practice it is difficult to simply patch-on a bonus scheme when you are dealing with many individuals of differing experience and practice area.
The reality is that each fee earner stands alone – their compensation ‘bonus’ must truly reflect a realistic fraction of what they can achieve for the organization. Any sort of truly equitable arrangement for a bonus scheme must take many factors into account and be prepared to review them frequently.