Your bonus system does not work.
Updated: Oct 11, 2019
Last Sunday, 6 October, while browsing the news over breakfast, an article on Bloomberg caught my eye. The title read “A Banker Reveals the Bonus Culture Behind a $220 Billion Scandal”. Bloomberg had interviewed Mikhail Murnikov a former banker at the non-resident unit of Danske Bank A/S in Estonia. He explains how the bonus system has led to wide spread money laundering: “The whole non-resident business was built on one principle: Everyone was making money on cross-border transactions because non-residents had to pay $90 per transaction, while the costs associated with each transaction amounted to $1.” By 2013, when profits peaked, Murnikov says Danske’s Estonian bankers were told to process close to half a million transactions for 4,000 non-resident clients, mostly from the former Soviet Union. That year, returns at the non-resident unit hit 402%, compared with about 7% for the whole Danske Bank group. “I had a clear plan,” Murnikov said. With the 300 clients he had, the former banker says he needed to “make 40,000 transactions a year so I could get a bonus.” He says the only metric Danske used to determine an employee’s bonus was the number of transactions he or she handled. (source: Bloomberg)
We at TGO Consulting regularly have discussions with our clients on their lawyer bonus system. Most law firms award their associates a bonus if they manage to exceed a certain threshold in billable hours. Despite this being widespread practice, in my opinion this bonus system is flawed. Let me explain some issues your bonus system has:
Working on billable matters is not a virtue
Working on billable matters is not a virtue, it is simply a lawyer’s job. In the most countries in the western world employees are expected to work around 1900 hours annually. The actual number varies a bit between countries depending on the number of public holidays and labor laws, but 1900 is a good ballpark figure to work with. This means that a normal nine-to-five office worker or industry worker will have to work 1900 hours for their salary. I don’t think that I need to explain that during these 1900 or so work hours, the employee is expected to be as productive as possible. Some companies go to great lengths monitoring their employees’ performance. Examples like Amazon and Ryanair spring to mind. So why do law firms consider it to be something special if a lawyer produces over 1500 billable hours. This would leave 400 hours unutilized (amounting to one full day every week). Amazon would never accept that I assume. Or if Amazon is too far-fetched, just imagine a corporate counsel who would spend only 4 out of 5 days in a week being productive for the company. So why would we award lawyers working in law firms a bonus for being productive only four out of five days a week? It does not make sense.
Billable hours are not the associates’ responsibility
Billable hours are not the associates’ responsibility. The main reason why associates don't produce 1900 billable hours is the partners not providing them with the work. As explained in previous articles, it is the responsibility of partners to make sure that the associates have sufficient files to work on. If partners would provide associates with a steady workflow, associates would easily be able to make 1700 billable hours without any stress. Still leaving 200 hours per lawyer for education, training, publishing, recruitment and so on. So, if it is not within the reach and responsibility of an associate to influence the workflow, why make their bonus depend on it. At least the bankers in Tallinn could influence number of transactions. The fact that the number of billable hours an associate can produce heavily relies on the workflow from the responsible partner, also makes the bonus system inherently unfair. A medium quality associate working in a small team of a partner that has a huge practice will get a bonus, as where the talented associate who happens to be part of a larger team where the partners has a smaller practice, will never get a bonus. I see this happen a lot. It is often not the best associates who get the bonus. Bonus system is often a lottery, where the associate just must be lucky enough to be connected to a successful partner. The bonus system does not reward quality.
The bonus system does not promote teamwork
The bonus system does not promote teamwork and rewards selfish behavior among associates. As with any performance metric, the bonus incentive will drive behavior. In any law firm that expects an annual hourly target of less than 1600 there is a structural shortage of client work. This means that the bonus system will encourage associates to not share work. An experienced associate might be tempted to self-handle non-complex matters that would be better handled by a more junior lawyer. This will hamper the training and education of the junior lawyers. For the firm as a whole, it would be best if all matters were handled at the right level. The bonus system is likely to undermine this principle.
So, if the commonly used bonus structures are no good, what are the alternatives. Firstly, in my opinion no one needs to be extra rewarded for simply doing their job. Bonus should be reserved for accomplishments that are really outstanding. At the same time, I would encourage law firms to set up a flexible lawyer remuneration system that would lead to lower fixed costs if business is slow. There are numerous ways to achieve this without using the billable-hour-based bonus system. If you are interested in this, please talk to us. As far as bonuses are concerned, why not let everyone share in the performance results of the firm or the team. Lawyers that operate as a team will always outperform a group of ‘selfish’ individuals.