A Double-Edged Sword: How Law Firms Can Make Their Bonus Systems Work For Them

Every law firm knows what it wants its bonus structure to do—retain its best talent, reward its highest performers, disincentivise partners leaving. In reality, a good number of law firms’ bonus structures don’t manage to achieve this fairly straightforward set of goals.

At one time, a bonus structure for partners at a major London law firm was simply unheard of. Before the flood—the flood of American law firms into London, that is—why would a partner even consider changing firms? Just stay in the lockstep and enjoy your pending seniority. But the increase in competition for talent in the profession since the U.S. firms arrived en masse in the 1990s have forced even the most traditional of London firms to offer bonuses. Lockstep became all but a museum piece and the carrot and stick of the bonus system took its place.

One attraction for firms was the flexibility of the bonus system. It could be wielded as an offensive or defensive weapon as needed. What became apparent over time, however, was that partners could use that flexibility against the firm too. A disgruntled partner could threaten to leave in the knowledge that the firm would likely try to placate them with a bonus.

At some firms, being grease for the squeaky wheel is now one of the major functions of the bonus system, something it was never intended to be.

Used properly, a well-structured bonus system can function as a vital tool to attract and retain talent. On the ‘carrot’ side of the equation, one-off payments under the bonus scheme can act as a very useful way to soften the blow for lateral hires who are likely leaving a significant amount of money on the table at their previous firms.

For individual lawyers who record a knockout year of billing but whose compensation doesn’t necessarily reflect it, irregular bonuses can be used to make sure they feel adequately paid for their achievements. So long as this is communicated clearly to the rest of the partnership, this is usually uncontroversial.

On the ‘stick’ side, staggering a bonus over a long period to make it particularly painful to leave is an approach with which many law firm partners will be familiar. Once January was bonus season and February was quitting season. The spreading of bonus payments means that this is no longer the case. This is undoubtedly effective—if unpopular—as a retention tool. The ultimate ‘stick’, of course, is the bonus clawback. Unsurprisingly the least popular remuneration tool law firms have at their disposal, it should only be used very sparingly to maintain morale.

The creeping complexity of bonus systems has been part of their undoing at some firms. An opaque blend of individual performance, team performance and firm performance acting as basis for a bonus calculation can mean that some high-performing partners can quickly become dissatisfied. Lawyers are a conservative bunch at heart. They tend to value certainty, transparency and predictability in most things, not least in their remuneration. They are not investment bankers or hedge fund managers, content to trade certainty today for the potential of riches tomorrow. The harder a bonus system becomes to predict, the more likely lawyers are to be unhappy with it. The more they feel they are in control of how much they earn, the more likely they are to accept it.

That is the key to creating a bonus system that serves a law firm’s interests well—tying it closely to individual production. Firms can sometimes be tempted to bring other factors into bonus calculations – for example, various metrics for ‘good citizenship’. Firms that take this path often find that harmony in the partnership is affected. The one thing that lawyers hate just as much as unpredictability in their compensation is subjectivity. Numbers that show up in the balance sheet are objective and difficult to dispute, but factors relying on fallible human judgement can trigger heated and acrimonious debate. That is something that a bonus system should never do. As much as possible it should accurately reflect individual performance and surprise nobody.

The question of how to create a well-structured bonus system is one that more firms in the U.K. are going to have to confront. While bonuses are a fact of life at virtually every firm of any significant scale in the U.S., there are still a number of sizeable U.K. firms that have resisted. As the competition for talent in the legal profession continues to heat up, most will eventually have to accept the inevitable. Those that build their bonus systems well will find it aids them in attracting and retaining the best talent. Those that don’t may soon find their own partners using it against them.