Are your remuneration schemes delivering the best results for your firm?
It’s time to try something different
Lawyers naturally want to be paid more. Firms want to make more money as well to increase partner profits. To achieve these goals, many firms will establish bonus schemes that are designed to encourage the right behaviours which should in turn lead to greater profits. Unfortunately, the reality of many of these schemes are that they are poorly thought through and they often lead to unforeseen consequences and a reduction in profits while individual lawyers might still earn bonuses.
Examples of bonus schemes that fail
To encourage lawyers to work at the margins and to generate additional fee income, many firms offer bonuses which are paid once a fee earner exceeds a certain number of chargeable hours in the year. While this sounds like a good idea the reality is that it will probably have a dramatic impact on the amount of work that is delegated by senior lawyers as they are being encouraged by the bonus scheme to do everything themselves. Meanwhile partners are often incentivised to avoid write offs at the point of billing and are targeted with a certain recovery rate if they are to achieve a bonus. Once again, this sounds like a good idea, but it may lead to partners encouraging lawyers to under record their time to reduce write offs. In this situation, you have two bonus schemes which are probably going to reduce the profitability of the firm.
Most firms struggle with turning time spent on client matters into cash. There is time locked up as work in progress initially which then gets locked up in debtors once it is billed. This lock up can be measured as WIP days and debtor days. Many law firms struggle with debtor days which is odd given that many firms offer debt recovery as a service to their clients. If partners are now financially incentivised to reduce debtor days, then what some partners will do is simply delay billing clients until they know the client will pay. This leads to no overall reduction in lock up as WIP days increase while debtor days reduce.
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So how should effective reward mechanisms be developed?
The starting point is for the firm to decide upon its financial objectives. Logically this would be to increase profits without increasing risk. It would probably also be to improve cashflow.
If your firm wishes to boost profits it should first think through their approach to achieving this objective. This can be done by improving margins or by increasing volumes or through a combination of the two. Most firms focus too much on volumes and attracting new work but fail to appreciate that most of this new work fails to generate any profit. Suppose your firm therefore decides to focus on better margins and not on increasing volumes; how will this be achieved? In many firms, the answer might be to try and focus on getting more work from the larger clients, because matters are larger and normally have better margins. Once this has been established we could now think about the behaviours that need to be encouraged to achieve these outcomes.
To run individual matters more profitably the work needs to be done at the right level so senior lawyers need to delegate. This improves efficiency and develops the relationship with the client as there are now more people dealing with the client. So that lawyers have time to focus on their key clients and attract further work from these clients they probably need to stop acting for smaller clients. How can we measure whether lawyers are getting better in the areas under focus? Well delegation is easily measured with hours leverage, being hours recorded by the team in total divided by the hours recorded by the partner. The higher this number gets the greater the level of delegation. How do we measure whether we are getting better at focusing on a smaller number of key clients? There are plenty of possible measures for this:
- Total number of clients (which should be reducing)
- Average fee size (which should be increasing)
- %age of annual billings being generated by the 20 biggest clients (which should be increasing)
All the above attention should now result in improving profits. This increase in profits can then be shared between partners, lawyers and support staff in many ways but linking this division to the key behaviours being encouraged would be no bad thing.
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