Business Strategy & Development

attorney handing over an annual bonus
By Postali

Key considerations for developing an attorney incentive plan that works for your small or mid-size firm.

If you’re the managing partner of a small or mid-size law firm, you’ve probably learned the hard way that there are many business decisions your law school education didn’t equip you for, such as attracting and retaining talent at your firm.

If you’ve had a successful year, you may be considering an end-of-the-year annual bonus for your associates to thank them for their hard work and contributions to the firm.

Providing an annual bonus can be a great morale-booster, but it’s not a decision you should make on a whim. How will you structure the bonus? What happens if next year, your firm isn’t as profitable? What happens if one of your attorneys leaves a week after you’ve paid out the bonus? There are many questions you should consider as you decide which incentive plan will work best for your law firm.

First, you’ll want to consider if you’ll offer a bonus based on personal performance, firm profitability, or a combination of the two.

Considerations for annual bonuses at law firms

Annual Bonus Based on Personal Performance

One of the most conservative methods is to provide an annual bonus based on an attorney’s contribution to the firm’s bottom line. This type of bonus provides lawyers with a great deal of incentive throughout the year, as their bonus is based almost entirely on their personal performance rather than the total profitability of your law firm.

For this type of bonus, you’ll want to ensure you provide transparency to your associates, and you’ll need to have a clearly-defined rationale for measuring performance. You should also consider the cultural impacts to your firm.

Fairness

If you’re going to bonus lawyers based on performance, it’s important to establish exactly how you’re going to measure success. If your firm operates with billable hours requirements, this provides an objective way to determine bonuses. Be careful with creating bonuses for associates who exceed their billable hours, as this can create a culture where attorneys feel they need to overwork themselves to be successful. If your associates are expected to bring new business to the firm, you can also use this as a factor in determining bonuses.

It’s not uncommon to include a mix of objective factors with subjective factors such as work ethic, client relations, and professional recognition. However, you should aim to measure these as objectively as possible, with clear examples on what an attorney needs to do in order to exceed expectations in these areas.

Transparency

For performance-based bonuses, transparency is important. Attorneys should never be surprised by their bonuses, and they should be provided with a clear understanding of how it’s calculated.

Performance-based bonuses may mean that you can’t offer a bonus to everyone at your firm. That’s okay, as long as it’s clear to every associate. First-year lawyers aren’t going to contribute as much to your profitability, but being up-front about bonus requirements will still provide motivation for newer associates, as they’ll know what they need to work towards in order to become bonus-eligible.

Cultural Impacts

One drawback of a bonus based solely on individual performance is that it can create a competitive culture. Some law firms are okay with that, and believe the competitive culture leads to more success and ultimately higher profits. But if you’d like to build more of a team culture at your firm, you may want to consider a different incentive plan.

Annual Bonus Based on Firm Profitability

Another option is to offer a bonus based on the law firm’s revenues or profits. As a partner, this relieves the pressure of worrying about giving bonuses during less-profitable years. In order to do this, you’ll need to determine how much profit you need in order to comfortably provide the benefit.

Sustainability

Remember that your profitability is going to vary based on the stage of your business. New law firms tend to be less profitable in the beginning as they’re incurring more costs. Unexpected expenses, like an increase in rent in your office space, can also make a dent, especially in smaller law firms.

Larger, more established firms are able to predict their business revenue and profits a bit more easily, so if your firm falls into this category, providing a profit-based bonus is less risky.

Communication & Expectations

Like any incentive program, you need to be clear with the lawyers at your firm how their bonus is determined. If you keep your business operations between you and your accountant, attorneys at your firm will have no idea if they’re receiving a bonus or not. You should provide some level of transparency throughout the year to help associates understand the health of the business and how the firm is pacing toward the ability to offer the annual bonus.

Morale

Profit-based bonuses create a team-like culture. However, you’ll need to make a decision about how seniority will factor into your bonus. For example, a more senior-level attorney may not be happy about a newly-hired, younger associate receiving the same bonus. A profit-based bonus doesn’t necessarily mean everyone receives the same, fixed amount. You may want to consider a tiered system based on an associate’s years with the firm and their level.

Offering a bonus during a profitable year may seem like a great idea to boost morale, but remember that the opposite is true for years that business is not as profitable. Giving a bonus sets an expectation. Next year, you may incur some unexpected costs that cut into the profitability of the firm. If you’re unable to give a bonus, associates may worry about the health of the business.

Things to Consider When Offering a Bonus

Of course, you can offer annual bonuses that are a combination of firm profitability and individual performance. These are generally more complex, but provide a good balance of accountability. During years where you may not have higher profits, you can still reward high-performing associates.

Before you decide the formula for your incentive plan, it’s important to take a step back and evaluate the bigger picture. An annual bonus is a means to show your appreciation for the associates at your firm, and it very likely will accomplish that. But you should make sure a bonus fits into your law firm’s business growth plan and benefit structure. Ask yourself these questions before you consider giving bonuses.

1. Are the rest of your benefits competitive?

If you manage a small or mid-size law firm, you want to ensure you attract and retain your top talent. If you’re considering an annual bonus, you shouldn’t view this decision in isolation. You want to look at your entire benefits package, including the perks of working at your firm.

An annual bonus can be a great tool to keep your associates happy and motivated, but it won’t be effective if the rest of your benefits aren’t competitive with your local market.

2. Do you actually know what your attorneys want?

The end of the year is a great time to re-evaluate your benefits. As firms grow, sometimes it can become more difficult for law firm owners to stay in-the-know on what’s important. A survey can help you understand if there are other areas you can improve to keep your associates happy.

Making partner. More time off. Better maternity leave support. There are countless benefits you could offer your associates, but do you actually know what’s important to them? You might find that an annual bonus is less important than something else you can provide as a benefit.

3. Can you actually afford it?

If your firm is profitable enough for you to consider offering bonuses, you should already be consulting with an accountant. An accountant will help you see the bigger picture and understand what an appropriate budget is for your benefits package. Since a bonus falls into the category of benefits, be sure you understand the total expense you incur.

At a glance, it may seem like you can easily afford to provide an annual bonus. But does your law firm consistently underspend on other areas, like marketing budgets or technology? While it’s important to keep your associates happy and well-compensated, you may not be able to offer a bonus without sacrificing something else.

4. How will you reward your non-lawyer employees?

Most attorneys will admit that they don’t know what they’d do without their secretaries. As you consider a bonus structure, consider anyone employed by your firm that isn’t an attorney. If you’re handing out sizable bonuses to the attorneys at your firm, does the gift basket you got your secretary really send the right message?

5. Are you feeling pressured to compete with Biglaw?

Hearing about Biglaw’s lofty annual bonuses can put pressure on small to mid-size firm partners who feel like they need to keep up. It’s important to remember that your firm operates differently, and the attorneys who work for you understand that.

An attorney wouldn’t expect the same bonus working for a large firm and moving to a smaller one, so you shouldn’t feel pressured to compete with them. Do what’s best for your law firm, and your associates will appreciate it.

6. Will bonuses be a factor of salary?

Most bonuses are set up to be a certain percentage of an associate’s salary. For larger firms, uniform pay scales provide transparency. Salaries for attorneys are based on a clear set of criteria, such as years of experience and background, so their bonuses will follow similar logic if they’re a percentage of salary.

Many smaller and mid-size firms don’t have as much rigor around salaries. If you’re going to create an annual bonus that’s a percentage of attorneys’ salaries, you need to make sure all of those salaries are fair and consistent.

Carefully Evaluate Annual Bonuses

While well-intentioned, the decision to offer a bonus at your law firm requires a lot of consideration. What works for the law firm across the street may not work for you, so take the time to carefully evaluate the decision and find the incentive plan that fits your firm size, culture, and revenue.