3 Questions You Need To Ask BEFORE You Institute Your Associate Bonus Compensation Plan

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Allison Williams: [00:00:05] Hi, everybody. It’s Allison Williams here, your host of The Crushing Chaos with Law Firm Mentor podcast. Law Firm Mentor is a business coaching service for solo and small law firm attorneys. We help you to grow your revenues, crush chaos in business and make more money.

 

Allison Williams: [00:00:26] Hi, everyone, it’s Allison Williams here, your Law Firm Mentor. And welcome to another episode of The Crushing Chaos with Law Firm Mentor Podcast, where today we’re going to talk about associate bonus compensation. So this topic actually came up over a dinner party, at a dinner party I was attending recently where one of the attorneys who was at the party said to me that she was really struggling with how to create a bonus incentive program for her associates. And it was interesting because this person has employed different attorneys over the course of her time as a business owner. And one of the things that she has said has always been kind of her go-to is the year-end bonus around the holidays. That’s kind of the incentive of great job for the year that she gives out to the entire team. And we’ve had conversations before and I’m sure I’ve talked about it on the podcast before that an end-of-year bonus almost feels like an entitlement rather than something that is driven by the performance of the employee because it’s given at the holidays. So a lot of people will associate it with gift giving and it also oftentimes if you’re just giving it at the end of the, at the end of the year, runs the risk that you could have an attorney or other employee, but more likely than not, an attorney who is planning their exit and uses the end of the year to get some extra PTO in, to get that nice big bonus that you give them and then immediately deflect at the start of the year. So you run a lot of risk by just giving a year-end bonus. But even aside from that, even if it were to be at the end of the first quarter or middle of the year, there still is something that seems very arbitrary and very gift like about just raining down money from the heavens on your team rather than having a structured program where whomever it is that is desiring or going to receive additional compensation can say: If I do X, I am going to receive Y in return. So I to her through three different questions I’m going to share with you today that are all about figuring out how to best create your associate compensation plan.

 

Allison Williams: [00:02:45] Now, here at Law Firm Mentor, we have a finance coach on our team, shout out to Wolfgang, who actually helps us to structure associate compensation for our clients. And we have various supermodels that we run through when it’s time to actually figure out what will be appropriate for your specific law firm based on how you charge if it’s hourly, or flat fee, or subscription, or contingency, and what your ultimate goals are. But I want to give you these three guiding questions so you can start the process of looking at your own law firm and saying, How do I need to configure my bonus compensation plan based on what I want to achieve? So let’s dive in.

 

Allison Williams: [00:03:29] The very first question that we, that we need to ask when we are trying to figure out what the appropriate associate bonus program should be is, what does your business need? Now, what I mean by that is there will be times in your business where you are at a high growth stage and you are generating tons, and tons, and tons of work, and you just can’t keep up with getting all the work done. And the person who is going to be most motivated by money or even the status of achieving the extra work or the possibility of promotion, the person who is aggressively moving up in their career, if you come to them and say, Hey, I’m going to give you a bonus for producing more work right now, I don’t need you to go out and get any work on your own. I’ve got more than I can handle, but I need you to do more and I’m going to give you something for that. That is an appropriate meeting of your needs to their desires, right? The whole idea is that you want to have a connection between what the law firm needs and what the individual employee needs so that the employee can see the win-win in this arrangement.

 

Allison Williams: [00:04:41] Now, this is not a situation where you have a lot of work and your general policy is I want my team to work until the work is done or work diligently, even above and beyond when we are at a surge of work. Because if you set that expectation, there’s nothing wrong with that. But if someone doesn’t see that they’re going to receive something extra for extra effort over the course of time that can breed resentment and that also can disincentivize someone doing extra work. Because over the course of time, the mind says, Hey, every time I do additional work, more work comes at me. So if I just do the minimum that’s required, I ultimately can protect myself from having an excessive workload.

 

Allison Williams: [00:05:28] So it’s really important that when you are seeing that you are having a surge in work and you want to ultimately incentivize additional productivity, that that be tied to additional compensation so that the person who’s delivering sees that this isn’t just a moment in time. This isn’t just today, I have too much in tomorrow, I have too little, and it balances out. But rather this is something extra that the firm is asking of me and they are rewarding me for giving more than I’m required to give.

 

Allison Williams: [00:05:57] Now, it’s important that you always be trying to create parity between what’s expected and what’s delivered, and you want to do that in the way that you talk about compensation in general. So what I mean by that is you don’t want to have an expectation that people come to work, work hard, get their work done and go home. Because while a lot of lawyers will hear that and think, Oh, that’s really altruistic, that sounds like a great workplace, not too much pressure people would like to have that. The reality is get your work done as a standard can either overly benefit the employee, meaning they come to work and if there’s very little to do, they work only a couple of hours and they go home, but they’re receiving the same compensation, or it can overly benefit the law firm, i.e. there’s a slavish amount of work and you’re not hiring anybody. So the employee is expected to work well in excess of what a reasonable workplace work schedule would look like. It’s important that you be meeting those needs right.

 

Allison Williams: [00:06:57] Now, there is ebb and flow in business, right? We all know this. So you don’t want have a situation where when times are really, really tough, you are expected to either do the work yourself, go hire someone and never call upon the associate to do the extra work. Or when times are really, really low, the associate expects that they can sit around and eat bonbons and receive the same amount of compensation. Right. So you want there to be a balancing out that the person who’s employed is getting the consistency of a paycheck and that is one of the major benefits of being an employee versus being an entrepreneur. You want them to get the benefit of that, but you don’t want to have kind of the loosey-goosey standard, if you will, that allows work to ebb and flow without having any expectation that your employee contribute to that beyond the baseline minimum. So you have to get people out of thinking in terms of what am I minimally required to do or what is the least that I can get away with doing in order to keep my job and instead be thinking about how can I achieve my goal of additional compensation? Part of that is through being a great team player and contributing more. Part of that can also be through bonus compensation that you would structure.

 

Allison Williams: [00:08:12] Now on the flip side, if you’re not really concerned about productivity, let’s say you have a reasonable amount of work coming in. You have more than enough work to feed the attorneys and the paralegals and other professionals who are on the team but you want more, right?

 

Allison Williams: [00:08:27] And let’s say that the strategy that you’re going to use, right, there are a lot of lots of different ways to generate leads in a law firm. Let’s say that the strategy that you’re going to use is generating leads through your associate. Well, if you are going to give your associates the benefit of being compensated more for generating more, then they need to see that as a benefit and thus be oriented toward receiving additional compensation that way.

 

Allison Williams: [00:08:52] I tell lawyers all the time we’ve actually have a podcast episode about the necessity of growth and the fact that if your business is not growing, it ultimately is dying because every year life gets more expensive, right? I’m recording this podcast in August of 2022 and we are experiencing a record high of inflation. So a lot of people are intellectually aware of it now that, oh my goodness, the fact that I chose not to grow, I said, Oh, I’m comfortable, I’ll just do me and stay right where I am. And if it happens to be that over the course of time, I’ll eventually raise my rates and I’ll get a little bit more. But I’m not really trying to grow. Then you start to see that as people are moving forward in their careers, your failure to grow is also going to stymie their ability to grow.

 

Allison Williams: [00:09:39] In fact, I know several law firm owners that who have reported to me that they ultimately were able to secure associates from other law firms where the associates said, I approached management and said, I want to advance, I want to become a partner one day, I want to earn more money. And the law firm said, Well, that’s great. If you generate more cases, you can earn more money. But we don’t ever intend to raise your salary because we have to keep a certain amount of profit in the company. And we’re not growing the company. The company is the size that it’s always going to be.

 

Allison Williams: [00:10:12] So when ultimately people see that feeling, that’s when they leave. Right. So you don’t want to run the risk of sending someone out the door. But if what you want to do is be able to grow your company through the efforts of your team, then compensation is appropriate for that. So you have to think about what your business needs, right? Do you need more production work? Do you need somebody to do the work that you’re generating or do you need more leads? Do you need more work coming in the door that can also be compensated for your team?

 

Allison Williams: [00:10:43] Now, in terms of whether or not you have a need for both, right? You both want to grow the company and you have too much work right now, meaning you need to hire, but you also want to incentivize legion. All of this has to be tied to target compensation, right? So you have to think about of the amount of money that is coming into the law firm. How much of that do you want to go to your team? Do you want a lawyer who generates 400,000 a year to be eligible to receive up to 200 of it through their base comp, their bonus comp, their benefits, and so forth? Well, if that’s the case, then you can’t set their income at 200 because the bonus compensation would then exceed the target compensation.

 

Allison Williams: [00:11:28] You have to be thinking about what is the amount that I want them to have ex out of that, the things that you know are going to reduce it like their benefits package, and then figure out of the base comp of the remaining compensation, how much do I want to be consumed with base and how much do I want to be consumed with bonuses? And when you think about how much should be going to the base comp, you have to consider generally what’s going on in the market. Now, this is not price fixing. Every time, every time I am online and I see a lawyer say, oh my God, you’re going to violate antitrust laws by asking the question what people are paying their team or what they’re charging? I, It’s hard for me to take that seriously because you’re not in concert with another person. I actually did very well in antitrust law. In law school, you’re not in concert with another person fixing prices. What you’re doing is trying to understand your marketplace. And you can get that data by simply having a lawyer, having a person call the law firm and ask the question, that’s not you. But nevertheless, right? Regardless, the goal is to find out, generally speaking, what the range is for people that you be compensating. And then you can choose to be at the high end of the low end of the range, but your, your compensation from bonuses has to ultimately, when added to your base and your benefits package, hit the target compensation. Right. That’s what your what your aim is through what you are giving to your team.

 

Allison Williams: [00:12:54] Ok. Second question that you have to ask, we’ve already talked about what will your business need? The next thing is what will motivate your associate. Now I hear this from lawyers all the time that Oh my God, I can’t afford because this person I’m going to hire and they’re going to want so much money. And I just only have so much and I’m nervous that I’m going to lose them. And what do I do if I can’t pay more? And there’s this fixation around the idea that there is somehow a limit on what you have, right? That if you give too much to your team, you won’t have a. That’s left over. You can always go out and make more money. That’s something that, of course, is a philosophical belief, but it’s also something that, if strategized appropriately, you can create.

 

Allison Williams: [00:13:37] So I definitely tell people it’s important that you always be mindful that you are not capped at what you currently have, right? You have the ability to create more. But it is important that when you are hiring someone, you take into account what you have at present and what you are going to create in the future so that you have your balance of your profit and your expenses in appropriate ratios. Right. And in thinking through that, it’s important to ask yourself from the perspective of your employee, what does this person need in order to be satisfied and ultimately to be compensated well in my company.

 

Allison Williams: [00:14:17] Now, compensated well does not mean the most money possible. Right? I’m sure if you ask any employee, would you like to make more money, the answer is going to be yes. Right? Who would say no to it? But you would be surprised how many people are driven by something outside of additional compensation. Right. And there are benefits that some people would forego if they could have more time as opposed to having more compensation. I’ll never forget one year we went through the exercise of asking people to give us an anonymous survey to answer the question What benefit would you like if you could have any benefit in the world as a result of working here or doing above and beyond the call of duty in your job? What would it be? And we got some very interesting answers, right? And only a couple of people said more money, right? Like literally just flat out I want more cash. But we had answers, everything from an additional week of vacation to the ability to not work Fridays in the summers, to the ability to opt-out of taking certain cases. And some of these benefits, some of these benefits that they thought would be for excess, we actually learned that we could give them right now and make them a happier, and happier employee overall.

 

Allison Williams: [00:15:35] So, for instance, one person said they didn’t want to work with a certain type of person and we had such diversity in the work that we were generating at that time and still do. That we were able to just give that person that right now. And literally, I ask that whoever had the desire to change up the type of work and the type of clients that they work with, that that person be open to directly come see us and we would see what we could do to give them that right now. And that person, just by virtue of our asking that anonymous question, was able to get what they wanted and work right now. Right. But aside from that, we were able to get so many positive responses, things that we hadn’t thought of. Somebody said that they wanted to have a pizza party in the summertime. Somebody said we had done a movie night. Somebody said, you know, taking the movie night to someone’s home instead of doing it at the office. So it felt more down-to-earth, so it felt more like a relaxing non-work experience. You know, there were a lot of things that we were able to create as bonuses and we were able to structure it in a way that it was kind of gamified so that the entirety of the team of professionals that were working with that individual were working collectively on the goal.

 

Allison Williams: [00:16:48] Now, there are obviously going to be some people that are just motivated by money. And as your company grows, right, you have to consider where you’re going, not just where you are. As your company grows, you might not want to differentiate the types of benefits that you give from person to person, but you might, right? You might want to have a structured bonus plan whereby people get to elect at the beginning of the year what bonus they’re going to be pursuing. You can build out your entire budget around if a person hits a budget, a goal so that they are entitled to bonus compensation that it’s already paid for by virtue of you starting at the beginning of the year, setting aside the funds that are going to be necessary for that. But the worst thing that you can do is presuppose that the only thing people care about is money and that you’re going to create an incentive plan that’s going to be based in money. Because for most people, if what they are doing is already considered to be a significant amount of labor, right.

 

[00:17:48] For a lot of people, lawyers consider it to be a significant labor, whether it’s lawyering or being a paralegal, working in a law firm with people who have very significant legal problems and oftentimes emotional problems as a result of those legal problems is taxing work. So if you say to someone, this work is taxing, I now want you to double it in order that you get more compensation. Some people will say, no, thank you, right? I don’t want to work that hard. And people have every right to say that. You know, you’re going to at some point encounter that you’re going to have a standard that somebody doesn’t want to meet. And sometimes when you encounter that in your own business, your thought is, Do I need to really let this person go? Maybe I can, I can push him a little. I can give him a little something extra. Some people are just not a fit for what you want to create. And that’s okay. Right. Release those people so that you can find your people.

 

Allison Williams: [00:18:40] But regardless, the worst thing that you can do is let your business be predicated on the assumption that you should be throwing money at people every time you perceive a problem. Someone’s not happy. I must have to pay them more money. Someone is not doing what they’re required to do. They must need more money. Right. And the worst thing that you can do, kind of dovetailing off of that when it comes time to talking about money, is to give people a bonus for what would be considered the minimum requirements of their job. Right.

 

Allison Williams: [00:19:10] So if you require someone to build 1500 hours a year, don’t give them a bonus for hitting 1500 hours per year, because as soon as you say to them, this is what’s required and you get something extra for doing what’s required, you are now at a disadvantage. You see that there’s no longer parity in that relationship, just as you would never say to a person, I want you to work even harder and I’m going to pay you less for whatever reason, right? You can say, I want to, I want to claw back more profit, so I’m going to suddenly pay you less. Well, no one would ever say that that’s fair. So the same thing should be true on the converse, right? You don’t want to give a message to someone that they have a requirement, but they keep their job. If they don’t meet the requirement and if they do have the requirement, they actually get a surplus. Right? Because surplus implies surplus effort, not that you’re doing the minimum.

 

Allison Williams: [00:20:01] I’ll never forget where here at Law Firm Mentor, we have someone who has a, an employee, a lawyer that’s pretty high up in the food chain in their company. And this employee lawyer came to the partner of the firm and said, it’s time for my annual review. Let’s talk. And in that annual review, that person when told that they’re going to keep their job and this is, you know, having completed the entirety of the review, the person was ready to hear what their compensation was going to be. And the owner of the firm said, okay, we’re going to keep you status quo with where you are. And the person was shocked and they were like, Well, I’ve been employed for a year. It’s time for me to have a salary review. And the owner said, Well, we are reviewing your salary. We’re nice enough to keep it where it is. And the employee was like, Well, I don’t understand. I’m supposed to get a raise. And the owner said quite astutely, No, no, no, a raise implies that you are doing something more this year, or the expectation is that your labor is worth more this year than it was last year. And frankly, you didn’t hit the requirement of billable hours that we have by I think it was over 200 hours. So while we worked with you on some of the challenges that you had that led to you having a shortfall, we’re not going to give you something extra when you haven’t even done what is minimally required.

 

Allison Williams: [00:21:26] So it’s really important that you keep in mind that there should always be parity between the expectation and what is ultimately offered in exchange for that expectation. So I give the expectation that I pay you a certain amount and I require labor in a certain, in a certain amount for that. And on the flip side, there should be the expectation that if they, if the labor is given that not only do they receive that compensation, but if they are advancing in some way, that they should receive more. Right.

 

Allison Williams: [00:21:57] So the whole idea of a bonus structure is that people can reasonably predict what they are going to have to do in order to receive something extra. If it’s not quantifiable and if the person can’t ultimately see how they’re going to benefit by virtue of what is offered, you’re less likely to get that additional effort right, because at some point people are going to tap out on the effort that they’re giving. They’re going to say, you know, legal work is hard, legal work is taxing, takes a lot of time, takes a lot of money. And I don’t want to give even more to my employer in exchange for what is at some point the law of diminishing returns, just not that valuable to me.

 

Allison Williams: [00:22:40] The third thing that we have to keep in mind when we’re thinking about associate compensation is you have to always keep in mind your MVP. That is your minimum viable proposition. So again, what is the absolute minimum that a person can produce in the role that you hire them for and still be viable and profitable for your company?

 

Allison Williams: [00:23:01] Now, this is not the same thing as saying what are the requirements that I have for the job? Because presumably, if you are listening to this podcast, you know that you should be engineering every role in your business for profit, right? Profit is not just the big chunk of change that’s available in the bank for you to go take and play. Profit is necessary in order to continue to fuel and fund the growth of the company. Right. That’s a healthy company that has a healthy profit margin. And so you want to be growing your profit, you want to be mindful of your profit, and you also want to be thinking about as you are creating your profit in your law firm, you want to be thinking about if someone falls below what is required for the role, they might not hit maximum profitability, but they can still be profitable, right?

 

Allison Williams: [00:23:48] So at some point when you figure out how much revenue a person is going to produce or facilitate producing, if they’re not directly doing the legal work in your company, then you’re going to deduct out what the expenses are for that person to be able to produce that amount of revenue. And then once you have figured that out, there should be something left over, right? We’re basically talking your standard gap accounting, right? You’re going to start with your income minus your expenses and get to profit. Or even if you follow the profit first system, you’re going to start with your income, you’re going to reduce your profit, and then you have your expenses. But when you are looking at that formula, whichever formula you use, at some point, there’s always the possibility that a person is not going to do 100% of what their job is engineered to do.

 

Allison Williams: [00:24:35] So you need to have that in your mind. Not only that, a person could fail to do 100% of what’s required, but what is the worst-case scenario, right? Because if you are managing your business by the numbers, you should understand that when a person is less than maximally profitable, they can still be employed. Right? You don’t want to go fire someone as soon as they dip below the maximum amount that’s required of their job.

 

Allison Williams: [00:25:00] But you don’t want to keep people beyond the minimum that’s required either. So let’s say you require 1500 billable hours of a person for a year and the person had a hard time, had some real struggles, had some family issues, just had a really, really tough year. And the person’s otherwise a great employee. Well, they’re not expendable, right? So at some point you can say, okay, this person’s having a tougher year, someone else might be having a good year and it balances out. But I have definitely seen people that tend to have a tendency toward attracting and retaining very challenged employees. Right. Employee after employee after employee has an issue. This once had a major death in the family. This one is having marital problems. This one’s having emotional problems. This one has, has had some, some academic issues in school, whatever the issues may be, there’s a lot of people with issues. And so if everybody is falling below the minimum that’s required at the job and it’s biting into the profit, well, at some point you can get to a point where you have no profit left or worse, you can be in the red.

 

Allison Williams: [00:26:10] So you don’t want to get to that situation in the way that you helped you avoid that is you manage your law firm by the numbers, but more specific to this conversation, you understand what the minimum viable proposition is for each role, how little can be done by your employee for them to still be considered profitable for the company.

 

Allison Williams: [00:26:30] Now, you don’t want to wait until that MVP has been hit in order to have a conversation with your team about the fact that they’re not meeting requirements. But you do want to have it in mind so that you can always be on top of what’s physically required for your law firm as you are continuing in business.

 

Allison Williams: [00:26:47] All right, everyone, I’m Allison Williams, your Law Firm Mentor. You have been listening to The Crushing Chaos with Law Firm Mentor podcast. I’ll see you on our next episode.

 

Allison Williams: [00:27:02] Thank you for tuning in to the Crushing Chaos with Law Firm Mentor podcast. To learn more about today’s show and take advantage of the resources mentioned, check out our show notes. And if you enjoyed today’s episode, take a moment to follow the podcast wherever you get your podcast and leave us a rating and review. This helps us to reach even more law firm owners from around the country who want to crush chaos in business and make more money. I’m Allison Williams, your Law Firm Mentor everyone. Have a great day.