Staff bonuses: handle with care

Bonuses may be a minefield, but if handled right they can be a huge staff incentive. By Mark Brandon

Bonuses are regarded as a necessary evil by some law firms and a key employment benefit by others, but universal they are not. However, having a bonus – and one that works – is becoming a crucial weapon in the renewed war for talent among the top law firms in the UK.

First the bad news: there is no such thing as a market-standard bonus. Bonuses vary considerably, with fee-earners in some firms able to earn up to 40 per cent on top of their salaries, while others get literally nothing. Many bonuses bear no relation to individual effort, while others are focused solely on it.

The key question is why firms are paying bonuses to begin with? The answer goes to the heart of the culture of the law firm.

Bonuses fall into two broad camps: ‘incentives’ or ‘thank yous’, and each can be applicable to the individual, the team or firmwide.

The firmwide bonus is the easiest to deal with, but has the pernicious effect of effectively rewarding underperformance, and an individual fee-earner may feel they have no influence over it.

The main downside with the ‘thank you’ is that of creating an expectation among fee-earners that can backfire if it does not happen. But the ‘incentive’ bonus has its own pitfalls.

Wholly discretionary bonus schemes – whether incentive or thank you – should be treated with caution. A poorly managed, opaque system can create resentment and accusations of favouritism.

Most firms calculate performance-style bonuses on hours billed rather than paid and delivered. This gets around the problem of a fee-earner billing X hours and the partner actually invoicing X minus Y (where Y is a discount arrived at by largely unscientific means). However, in any hours-based system, firms need to be careful that fee-earners do not pad their hours.

Many bonus schemes are capped, but the firm doing this has to ask itself why. The anti-capping argument is simple: capping the bonus effectively caps the effort, but others see uncapped bonuses as an incentive to hoard work or over-bill, a situation that can turn ugly when there is a lack of proper supervision by partners.

Increasingly, firms are rewarding individuals for effort outside regular billing activity, such as business development activity, pro bono work, training, client seminars, or even graduate recruitment. The key issue here is what precisely counts, how is it accounted for, and by whom?
As the recruitment market tightens, evidence is emerging that bonuses, or lack thereof, are calculations in candidates’ minds. Other factors, such as quality of work and basic salary, remain more important, but the bonus is viewed as just that – a bonus. If the other factors are working for a candidate, the bonus is less important.

However, candidates are likely to build a bonus into their thinking if they are used to receiving them. Depending on the mindset of the candidate, an entrepreneurial bonus can be viewed very positively (as an opportunity to earn significantly more money) or quite negatively (imposing tricky targets).

Despite being a seductive management tool, given how many possible levers it can affect, the bonus is an instrument to be used with considerable caution.

“If you try to bring in a scheme to try to initiate wider cultural changes, you’re going to struggle,” says one City HR director. “That’s the tail wagging the dog. Any bonus has to reflect the culture of the firm, not attempt to create or modify it.”

Mark Brandon is a consultant with recruitment agency First Counsel