Determining Attorney Bonuses: Subjective and Objective Considerations

Law firms rely on bonus systems not only to motivate and retain exceptional attorneys but also to foster a culture of transparency and adaptability. These firms use a combination of subjective and objective methods to determine bonus amounts, tailoring them to their own unique values and desired behaviors. While there is no one-size-fits-all solution to creating the perfect bonus plan, the most successful law firms prioritize transparency and view compensation as an ever-evolving system that adjusts to the changing times.

Subjective Bonuses

Subjective bonuses work to recognize intangible value, and specific accomplishments and to appreciate unique contributions. Subjective bonuses can also help when no measurable economic data exists. (For example, a bonus awarded for academic achievement.)

Typically, the following areas lend themselves to subjective rewards.

Assessing the monetary value of a subjective contribution is difficult. However, we have found that it is worthwhile for firms to acknowledge these contributions in the bonus -  even if the recipient anticipated a larger award.  A process that acknowledges such contributions carries the benefit of recognition, even if not appreciated monetarily.  

Consistent application of subjective bonus awards, coupled with an articulated subjective bonus philosophy (critical), can help manage expectations over the long term and even draw peer support for the policy. Consistent application is easy enough to understand, but the philosophical part of a bonus plan is more of a challenge.

For example, one element might include the following statement:

The firm truly values and acknowledges the dedication and commitment of attorneys who invest in their professional growth and contribute to the success of the firm. We foster a supportive environment that nurtures career development, and we actively invest our time and resources in our team members based on their merit. Attorneys should understand that while subjective contributions can potentially lead to monetary rewards, the true benefit lies in enhancing their capabilities, delivering greater value to clients, and experiencing personal growth and fulfillment. We do not tie subjective awards to the specific value of each contribution, but rather utilize them as a means to encourage continuous development among our lawyers. These rewards may vary from year to year and are discretionary in nature.

The benefit of putting subjective bonus plans into context is that it reduces the potential for unmet expectations. For example, a firm may plan to invest heavily in non-billable activities in the current year to achieve certain strategic goals. As a result, short-term earnings may suffer. Communicating this information (the plan), the anticipated long-term benefits (why), and any potential impact on subjective bonuses will help manage expectations. It is important to communicate that an investment of time is effectively a monetary career investment and likely carries more long-term value than a short-term cash award.

When properly administered, a comprehensive salary and bonus administration process leads to better morale, making it one of the most effective tools for strategic accomplishment. 

Objective Bonuses

Typically, objective bonus plans include rewards for meeting or exceeding expected levels of billable hours, billings, or collections. Profitability can also factor into objective bonus plans. These plans are most effective when they are straightforward and transparent. Transparency encourages attorneys to emulate the actions of those making more than them.

Objective plans create the most incentive when they clearly explain bonus calculations and the timing of payment. Ambiguous bonus payment schedules and unclear methodology used to calculate bonuses work as a disincentive. Consistency is also a key element of any objective bonus plan.

Firm members may resist applying profitability metrics in bonus decisions. It takes a lot more time and effort to tabulate and apply profitability metrics than it takes to simply use billable hours in determine bonus amounts.  Profitability results are also much more complex and difficult to understand and communicate than a billable hour and realization rates.  However, applying profitability metrics to bonus decisions can be much more effective in supporting a firm’s strategic goals.

Should firms share profitability data?

Profitability models also require more transparency and information sharing of the firm’s cost structure.  This makes some partners uncomfortable. In our experience, sharing information has more benefits than detriments. Almost all non-owner lawyers have ideas about their profitability, whether they are correct or not.  Some of these beliefs can cause issues, leading to low morale or worse.

For example, it is not unusual for us to have a profitability discussion with a young lawyer who believes that every dollar he earns for the firm in excess of their base salary is profit.  Some factor in a benefit load, but many do not. Some include an allocation for overhead, but it is rarely accurate.  When this occurs, an unfair view of their profitability is created, and unreasonable compensation expectations can follow.

The benefits of sharing profitability information include:

• Helps manage expectations;
• Encourages firm management to operate efficiently;
• Fosters a compensation system that is competitive;
• Incents improved billing and collection realization, cost management and revenue maximization (rates and other billing approaches);
• Improves business acumen and maturity at all levels;
• Supports profitable practice building;
• Prepares lawyers for eventual partnership; and
• Mitigates the tendency to focus on billable hours to the exclusion of all else.

Sharing profitability information is not without challenges - especially when the concept is initially implemented. Information is empowering... Lawyers who receive this level of financial information for the first time may make impulsive decisions based on their interpretations of the results.  Seeking clarity and a desire for immediate improvement, they can challenge the status quo, and the conversation can turn counter-productive.

Additionally, those who underperform can challenge the methodology for calculating their profitability.  Some may consider the firm’s profit margin on their work is too high and demand a larger share. Still, others may argue that using profitability to determine compensation is unfair because they do not control their client and case assignments.

As law firm consultants, we have helped clients with profitability management and information systems since the inception of the firm, and just when we think that there is nothing more to add to this conversation, we encounter a new way of looking at these data.

As mentioned previously, we believe that the benefits of sharing profitability data far outweigh the detriments, especially when accompanied by a quality calculation process, comprehensive guidelines, and accountable management.

Alternative compensation plans

In certain situations, compensation plans that do not include a typical base salary and bonus approach work better.  We call these alternative compensation plans, but that is mostly for convenience. Except for completion or tasked based compensation, these compensation approaches have existed in one form or another for many years. The most typical of these plans include

In summary

A comprehensive approach to paying lawyers involves written guidelines, rules, context, and philosophy, along with transparency and a level of structured flexibility. By implementing such an approach, your law firm can create a fair and motivating compensation system that rewards lawyers for their contributions and supports the strategic needs of the firm.

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