Bonus points

Major change is taking place in the way that law firms reward staff, particularly the rank-and-file fee-earners. Pay rates and reward structures are being imported from US law firms via their London offices, and are leading to changes within City firms. One of the most noticeable changes is the greater use of bonuses.`While profit-sharing schemes are the basis of all professional partnerships, the use of bonuses in law firms for associates and assistants, and in some cases for non-fee earners, is becoming more common.`But in some ways, the legal profession is merely reflecting what the rest of industry already does. Duncan Brown, principal at employee benefits management consultancy Towers Perrin, says: “We conducted a study of 460 organisations across Europe and 96 per cent of all respondents offered some kind of bonus scheme, with most offering three or four.”`Brown says that the fact that so many firms run bonus schemes suggests that they are good for business. “Either that or it is the biggest case of the emperor's new clothes in history,” he says.`But why have bonuses suddenly become de rigueur for law firms and how can a firm be sure that the scheme it sets up will work for the corporate good as well as for the benefit of individual employees?`San Francisco-based Morrison & Foerster's London office recently announced it is reviewing its pay and bonus structure. London managing partner Kristian Wiggert explains that pressure for the use of bonuses has been growing in the US for a while. “For several years this pressure has been coming from below,” she says. “Staff are working hard for the business and working with people from other sectors, such as banking, where there is heavy use of bonuses. Staff in law firms want to be rewarded in the same way.”`Another reason for the popularity of bonus schemes is the relatively low rate of inflation, which makes it difficult to offer staff the incentive of large pay rises. A 3 per cent pay rise may be a relatively good offer, but it does not have the same impact as the same amount of cash offered in a lump sum.`According to Brown, bonuses are also being used as a means of keeping a tighter relationship between pay costs and the performance of the company. This is particularly true for the large law firms, where logic dictates that there has to be some ceiling on the level of base pay offered to newly qualifieds. Already salaries are hitting £60,000 in some areas and there has to be a limit as to how much further they can go. It seems that the time has come to tie pay more directly into output.`This was part of the reason for the bonus scheme implemented by Denton Wilde Sapte following last year's merger of Denton Hall and Wilde Sapte. The firm operates a bonus scheme that pays out different amounts based on output, measured through chargeable hours.`Denton Wilde Sapte's personnel director David Fowler points out that the firm found a huge spread when it looked at the levels of staff output. “We looked at the spread of hours that staff were doing, looking in particular at chargeable hours and accredited non-chargeable hours. The spread was from 1,200 to 2,400. In other words, there was a difference in performance of up to 100 per cent. The bonus scheme works on a sliding scale, based on chargeable hours. Starting at 6 per cent for those doing 1,500 hours, which will rise this year to 10 per cent, and increasing to 20 per cent for 2,000 hours.”`Although linking bonus pay to the number of billable hours seems a sensible way of establishing a firm relationship between pay and performance, it does not have universal appeal. At Morrison & Foerster, for example, although the details of the new bonus scheme have yet to be finalised, Wiggert is adamant that it will not be based solely on hours.`”We're attempting to have bonuses that are based more on people's performance so that there will be a discretionary element. For us, hours are less of a driver, it's more about how we perform for clients. Also, it's important to remember that people have different ways of contributing,” she says.`Wiggert claims that a more equitable, discretionary bonus allocation is in keeping with, and will reinforce, the culture of the firm. The implication is that bonus schemes can do more for a firm than simply improve its financial performance.`There have been various attempts in recent years to establish a clearer link between bonus schemes and the performance of a company. The overriding theme of much of this work focuses on the idea that a bonus scheme makes staff feel good about their employer, and therefore willing to work harder.`But Brown is sceptical of how this relationship works and the extent to which causality can be found. “All the research can really show is that there is a relationship between how a company performs and how staff feel and this is usually connected to a basket or bundle of human resources' practices of which performance bonuses would be a part.”`Bonuses are also used as tools to achieve other ends. One of the most common reasons for offering a bonus is to retain staff. Again, an element of this works through the notion of goodwill. Employees who are happy with the company are obviously less likely to move. But in the current labour market, with quality staff in very short supply, many firms are being forced to offer targeted bonuses just to keep hold of key teams. However, by using bonus schemes as 'firefighting' rewards, varying them according to the importance and value of a team to competitor firms, employers may undermine the benefit of bonuses.`Brown says that the major factor determining the success of a bonus scheme is that the company has a clear idea of what it hopes to achieve through the scheme. “Companies have to ask themselves what they are trying to do with the bonus scheme. What is the objective of it?” he says.`Brown goes on to cite one professional partnership where some staff felt it was appropriate to offer a share of the profits to pre-partner level staff. Others wanted to leave the system as it was, with the rewards accruing to staff only once they had reached partner level. The result was what can only be described as a messy compromise. Most of the money was distributed among partners, with a small amount offered to pre-partner level staff, but the amount was so small it was considered as more of an insult by those it was offered to.`Denton Wilde Sapte's Fowler says that when the firm came to consider its new bonus scheme it had very clear objectives. “We wanted it to be transparent and to separate reward for merit from reward for output. There is a difference between merit, which comes down to skills and experience, and output. The merit aspects of reward are met through basic pay, and we grouped together merit by qualifying dates. The bonus scheme deals with output.”`But Brown says that the key point is not to adopt a bonus scheme on the basis of some crude carrot-and-stick approach to motivation.`Another factor affecting the way any bonus scheme is structured is the extent to which individual and collective performance is rewarded. One major decision is whether to run separate schemes for each or to combine them into one, with a percentage of the bonus attributed to team or company performance and the remainder to some measured assessment of individual performance.`While there are clear advantages to administering only one scheme, the danger of a combined scheme is that it gets too complicated for employees to understand. In this case the motivational value may be lost, especially if staff do not perceive any clear link between how hard or effectively they work and the rewards they receive.`As to what the future holds with regards to the role of bonuses in law firms, Fowler seems to sum up the general mood. “There will be increasing use of bonuses, but I don't think we'll ever get to the stage where reward is focused totally around them,” he says. “Six Rules for a Healkthy Bonus`Set clear objectives. It is impossible to measure the success of a scheme without knowing what you wanted it to achieve. The design of the scheme should reflect these objectives.“Consult with staff of all levels. Staff are more likely to respond favourably if they are involved in the design. At the very least, communicate the objectives so they understand what the firm is doing and why.“Make sure the scheme is easy to understand. Staff will react better to a scheme that is simple and clear.“Be sure that the amounts of money involved are meaningful to the staff concerned. Any extra effort that staff have made has to be appropriately rewarded.“Be aware of what criteria are being measured and what impact they will have. Avoid measuring and rewarding a quantity of output without building in safeguards to maintain quality.“Make sure the bonus scheme fits in with the culture of the organisation.