Budgets, Targets and Rewards In Your Practice
The whole world is trying to generate growth to end the economic downward spiral and most law firms would benefit from some growth too. If fee income continues to fall, it will clearly be difficult to report increasing profits. The starting point is having a set of financial targets which fee earners understand and own and which incentivises them to perform better.
The budget should be the level of performance required to hit the minimum expectation of the firm. Fee earners are hopefully paid a market rate salary to at least achieve this budget and should only expect to be rewarded with promotion and bonuses if they can hit targets which are set at a higher level.
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I am regularly asked to comment on how a firm should budget for each of the main financial drivers such as chargeable hours, gearing, charge-out rates, recovery rates and WIP & debtor days. The starting point should be to benchmark yourself against comparable firms to make sure that your expectations are not unrealistic. When benchmarking you could set the budget at the median or the upper quartile level.
When budgets are imposed from benchmarking data they are often rejected by fee earners as being unrealistic and it is argued that the data is not really comparable with their firm. An alternative way of budgeting is simply to use the actual figures for last year. We are always striving to do better and so to assess performance against that of last year is a sound starting point and there can be no argument about whether this is comparable data!
The targets should be aspirational and are designed to motivate fee earners to perform at a higher level. To set targets at just 5% above the budgeted figure can lead to a very significant change in performance for individuals and teams if these targets can be achieved. So, if the chargeable hours budget is 1200 and the target is 1260 then this would hopefully look attainable to the fee earner while if the target was set at 1800 it would be immediately rejected. Equally, if recovery last year was 80% but a target is set at 84% then perhaps the fee earner can be motivated to hit the target.
The reward for hitting targets can come in many forms. There is the personal pride in performing well, a thank you from management or a financial reward. If the performance level achieved can be repeated then perhaps a salary rise is also in order, while if the achievement is unlikely to be repeated then perhaps just a bonus is more appropriate. It is really important that any bonuses are linked to the performance of the business, the team and the individual and are not simply linked to the performance of individuals as this can become divisive.
It is fairly straightforward to create mechanisms that result in bonuses being paid only out of additional profits being generated in the firm.
Once you have established your budgets and targets they need to be communicated to and explained to fee earners. Then we just wait to see whether our approach has worked and whether we have generated some profitable growth.