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Associate Bonuses and Hourly Thresholds: Why Now is the Time to Consider a New Reward System
Last year I wrote an entire series on partner compensation: it’s various structures, components, impacts and outcomes. In this blog we’ll focus on a topic that does not get much attention – associate bonuses. If you read Above the Law (and we all do…even if some don’t want to admit it) you will know that they have an entire thread dedicated to this topic. The interesting theme when reading about associate bonus structures or simply speaking with clients is that virtually all additional compensation for associates is based on hour thresholds. Even more interesting is that there are very few discussing how this practice can cause a myriad of poor outcomes for the firm’s business.
If an associate is aware that his or her bonus is completely based on meeting hour thresholds, then why wouldn’t the associate rack up and enter as many hours as possible – without bringing undue notice, especially if oversight at the firm is lax. For the firm (taking ethics aside), if the client pays for all the hours and remains happy, then this might be fine from a revenue standpoint. However even in this type of situation the premise of “reaping what you kill” and caring only about personal production can have a long-lasting impact on the future of the associates. It has been said that some law firms are just a set of sole practitioners loosely knitted together. Instilling a mindset of “me and my production” early will not do anything to combat that trend.
See the Hidden Dangers of Hour Thresholds
Reality will tell us that clients have a much tighter focus on legal fees these days. Alternative fee arrangements have become more popular and some clients refuse to pay for first-year associate work. In addition, clients are looking for efficiency and the level of discounting on associate work can be substantial given specific engagements. In these more realistic scenarios, having an associate rack up hours to meet a bonus threshold can have significant financial ramifications as well as impacts to client satisfaction. Inherently these bonus structures do not encourage efficiency or collaboration in any manner whatsoever.
At the most extreme end, we can look at a fixed-fee arrangement. When you have tight budgets and timelines, having a bonus structure that calls for the exact opposite can be very damaging. Associates likely won’t want to work on the engagement thereby potentially impacting quality and profitability. Some firms encourage efficiency by providing full budgeted-hours credit, even if the associate clocks fewer hours than budgeted. While this approach is interesting, this type of reward can also be manipulated by overly inflating the budget, knowing that the end impact won’t be to the client.
Focus on the Right Attributes
To be productive members of the firm, it’s important that associates drive revenue. However, a bonus structure that looks at an associate’s overall career picture of is far more appealing. Firms can and should have a financial component within the bonus structure, but it may be better for the firm to focus more on the profit that an associate generates rather than the number of billable hours. In addition, new skills learned, client interaction, collaboration with other timekeepers, and additional value brought to the firm has to be taken into account. It’s better to have an efficient associate that is underutilized than one that is over utilized and ineffective. At least with the former there is a long runway of opportunity. Unfortunately given the core component of existing bonus structures, the ability to distinguish these individuals is compromised.
Establish a System that Leads to Long-Term Success
Be it partner compensation, partner promotions, or total associate compensation – the message remains clear. The criteria you reward your timekeepers with will most certainly dictate their behavioral patterns and the end result to the firm. Establishing a sound associate bonus system that achieves the right patterns for long-term success requires a series of adjustments that any firm can accomplish. If you’d like to discuss how Wilson Legal Solutions can help you do this, please contact us for examples of some of our products and services.