Associate Bonuses – The onus on the bonus

A&O rocked the City with the news that it was to hike associate pay and introduce bonuses. The Lawyer can now reveal how the City’s finest measure up

It was an ambush. As first reported on www.thelawyer. com (12 October), Allen & Overy (A&O) shocked its rivals by announcing a 15 per cent pay rise for all of its London-based trainees and associates and a new performance-related bonus explicitly linked to partner profit.

The news surprised A&O’s rivals: the firm’s associates had already received catch-up pay hikes earlier in the year, sparked partly by A&O’s decision to raise its associate rates by 20 per cent last November in response to an attrition rate of 25 per cent.

At the time of going to press, rival firms were still examining the impact of A&O’s new associate remuneration structure.

Most firms’ responses were bland. Clifford Chance’s official response, for instance, was: “We always monitor the market to ensure that our total reward package is competitive and will continue to do so.”

But in private, partners at a number of firms were quick to stick the boot in: a number even admitted that they did not fully understand how the new bonus scheme works and questioned whether associates at A&O will even be better off.

One magic circle partner argues: “It does look a bit desperate.” Another partner was concerned that rival firms may be forced to act like lemmings.

On the face of it, A&O’s associates look like they are going to be in for a massive windfall. Indeed, as reported by The Lawyer last Monday (16 October) senior associates will, in theory, be able to earn almost £200,000. This amount dwarfs the potential maximum payment of £139,600 for which Linklaters senior associates are eligible.

Linklaters associates with five years’ PQE receive a basic salary of between £94,000 and £98,000 and a performance-related bonus of up to 40 per cent, as well as a firmwide bonus, which last year was £2,400.

But once you push the headline-grabbing numbers aside, it soon becomes obvious that A&O’s new remuneration structure is not entirely what it purports to be.

This, The Lawyer’s first-ever associates’ guide to bonuses, compares and contrasts the bonus structures adopted by the City’s top 10 firms and separates the myth from the reality.

A&O’s new pay structure has two limbs. First, all London-based trainees and associates will receive a 15 per cent pay rise, effective 1 November 2006. This is essentially to replace the firmwide bonus, which is being scrapped in favour of a performance-related bonus. The firmwide bonus that was paid to all staff at the end of the 2005-06 financial year was equivalent to six weeks’ pay – which is a little more than 10 per cent of the base salary. As such, trainees and associates may not be significantly better off under the new system.

Second, the firm has introduced a performance-related bonus in a bid to reduce associate attrition rates.

Our survey also reveals that when it comes to performance-related bonuses, A&O is playing catch-up with its rivals. With the exception of Slaughter and May, all the firms surveyed offer performance-related bonuses to their associates.

Indeed, as Joanne Street, a business manager at recruiter Hays, says: “There’s an expectation from associates at all levels that part of their remuneration package will have a bonus element. Firms that don’t have bonuses will suffer when recruiting.

“Law firms have to be more commercial these days and have to reward high performance. The flat structure has gone.”

A&O’s bonus does, however, have two features that make it unique among the rest of the top 10 City firms. Rather than copy its rivals, A&O has opted for a structure whereby the size of the bonus will be linked to the value of a partner profit point (see table).

Furthermore, in a cunning attempt to improve retention rates, the first performance-related bonus is not going to be paid until July 2008 – yes, you have read that correctly – to encourage retention. A&O is the only firm in our survey that has such a lengthy vesting period. All the other firms pay their bonuses two to three months after the end of the financial year.

And A&O is also the only firm in the top 10 that does not offer a performance-related bonus to its junior associates. Associates must have at least two years’ PQE to qualify for the bonus.

Linklaters, which introduced a performance-related bonus several years ago, is arguably the most generous to its junior lawyers. Trainees and junior associates are eligible for up to a 40 per cent bonus. Indeed, some of the firm’s associates received a 40 per cent bonus at the end of the last financial year, while a handful received even bigger percentages.

The size of Lovells’ bonus is also the same at all levels. But its maximum award of 30 per cent is less generous than Linklaters’.

A&O and Freshfields Bruckhaus Deringer are the only firms in our survey that do not link their bonuses to chargeable or billable hours targets. Meanwhile, Norton Rose recently slashed its billable hours target, meaning its bonus now kicks in when 1,500 hours have been recorded. Up to 100 of those can be devoted to ‘knowledge management’.

Slaughters is the odd one out in our survey as it is the only top 10 City firm that does not have a performance-related bonus. But in light of A&O’s decision to join the bonus bandwagon, Slaughters, which is currently reviewing associate salaries, may have to bow down to market pressure. One Slaughters partner claims the firm has resisted the urge to introduce a bonus because it goes against its culture of having no billable hours targets. Another partner says: “Nothing has been ruled in and nothing has been ruled out.”

The debate on the advantages and disadvantages of bonuses continues to rage, but one thing is for sure and that is that they are here to stay. And, like it or not, A&O’s remuneration structure has compelled at least the City’s firms to be more transparent about how they calculate the size of their bonuses and determine how the pot is shared.

Associate bonuses at top 10 City firms

Clifford Chance
Who is eligible?
Associates with at least six months’ PQE.
What is the size of the bonus?
– For associates up to one year’s PQE – up to 20 per cent
– For associates with 1.5 to 3.5 years’ PQE – up to 30 per cent
– For associates with four years’ PQE upwardsup to 40 per cent
When is the bonus paid?
June, following the end of the financial year to which the bonus relates.
Is the size of the bonus linked to a billable or chargeable hour target?
The bonus is rewarded on the basis of a balance between quality of performance, actual billable contribution and value-added non-billable activities such as pro bono work.
What is the billable or chargeable hour target?
1,700.

Linklaters
Who is eligible?
Trainees and associates, from newly qualified level.
What is the size of the bonus?
Both trainees and associates are entitled to a performance-related bonus of up to 40 per cent of their base salary. Last year some associates received a 40 per cent bonus, while a handful received a payment of more than 40 per cent. Trainees and associates also qualify for a profit-related bonus, which last year was £2,400.
When is the bonus paid?
June, following the end of the financial year to which the bonus relates.
Is the size of the bonus linked to a billable or chargeable hour target?
The bonus is calculated by reference to the overall contribution an individual has made (in both chargeable and non-chargeable time) and their performance (as assessed during their appraisal process).
What is the billable or chargeable hour target?
No target.

Freshfields Bruckhaus Deringer
Who is eligible?
All associates, from newly qualified level.
What is the size of the bonus?
– For associates up to 18 months’ PQE – up to 20 per cent
– For associates between two to three years’ PQE – up to 30 per cent
– For associates with more than three years’ PQE – up to 40 per cent
When is the bonus paid?
June, following the end of the year to which the bonus relates.
Is the size of the bonus linked to a billable or chargeable hour target?
No.
What is the billable or chargeable hour target?
Not applicable.

Allen & Overy
Who is eligible?
All associates with at least two years’ PQE and counsel qualify for a bonus. Newly qualified associates will be eligible for a flat payment, which will only be paid once they reach two years’ PQE.
What is the size of the bonus?
The size of the bonus is linked to the value of a partner profit point (unit) and level of PQE. Last year one unit was worth £24,008.
– For associates with two to four years’ PQE – 0 to 100 per cent of unit.
-For senior associates with five to seven years’ PQE and counsel – 0 to 200 per cent of a unit.
When is the bonus paid?
The percentage of the unit determined at the end of the financial year. The size of the bonus is finalised in July once the accounts are audited. The bonus is paid the following July.
Is the size of the bonus linked to a billable or chargeable hour target?
No. Awards are based on: #individual performance; #individual value to the business, current and prospective; #overall performance of the firm, current and prospective (bonus is not linked to the profit of a practice group).
What is the billable or chargeable hour target?
Not applicable.

Lovells
Who is eligible?
All associates from newly qualifieds upwards are eligible for a bonus and the size of the bonus is the same for all levels.
What is the size of the bonus?
Up to 20 per cent of the bonus is linked to chargeable hours and an additional 10 per cent is available for other contributions to the firm’s success.
When is the bonus paid?
June,following the end of the financial year to which the bonus relates.
Is the size of the bonus linked to a billable or chargeable hour target?
Partly
What is the billable or chargeable hour target?
1,700.

Slaughter and May
Slaughter and May does not operate a bonus system

Herbert Smith
Who is eligible?
Trainees qualify for a profit-share payment of of 5 per cent. All associates are eligible for a performance-related bonus.
What is the size of the bonus?
– For associates up to 3.5 years’ PQE – up to 20 per cent
– For associates with four years’ PQE plus – up to 30 per cent
– For of counsel – up to 40 per cent
The 5 per cent profit share is included in the 20, 30 and 40 per cent payments.
When is the bonus paid?
May, following the end of the year to which the bonus relates.
Is the size of the bonus linked to a billable or chargeable hour target?
Yes. A discretionary bonus of up to 2 per cent is available for those who attain 1,500 and 1,699 chargeable hours.
What is the billable or chargeable hour target?
1,700 (but not necessarily billed).

Simmons & Simmons
Who is eligible?
All associates from newly qualifieds.
What is the size of the bonus?
The bonus is calculated on an amount, not a percentage and the size of the bonus varies with experience, not with each qualification year. There are six levels of experience. For example, at newly qualified level, if 1,700 billable hours are reached, the bonus will be £10,000. If a newly qualified reaches 1,800 billable hours, the bonus will be £11,000. This goes up in steps to a bonus of £16,000 at 2,300 billable hours with discretion applied thereafter.
When is the bonus paid?
July, following the end of the financial year to which the bonus applies.
Is the size of the bonus linked to a billable or chargeable hour target?
The bonus is based solely on billable hours.
What is the billable or chargeable hour target?
1,700.

Ashurst
Who is eligible?
Both trainees and associates from newly qualifieds upwards qualify for a bonus.
What is the size of the bonus?
The bonus is discretionary and in theory there is no cap on it. There is a trend towards increasing bonuses as seniority increases.
When is the bonus paid?
June, following the end of the financial year to which the bonus applies.
Is the size of the bonus linked to a billable or chargeable hour target?
The bonus is based on a number of factors, including chargeable hours (an associate has a guaranteed share of the bonus if 1,600 hours are billed), pro bono work and significant contributions to the business.
The trainee bonus scheme is the only scheme that is based solely upon recorded hours.
What is the billable or chargeable hour target?
1,600.

Norton Rose
Who is eligible?
All associates from newly qualifieds upwards. Trainees are part of a separate bonus scheme.
What is the size of the bonus?
2.5-30 per cent of base salary.
When is the bonus paid?
August,following the end of the financial year to which the bonus applies.
Is the size of the bonus linked to a billable or chargeable hour target?
Yes, although up to 100 hours of knowledge-management hours may be counted towards the bonus.
What is the billable or chargeable hour target?
1,500.