One of the biggest mistakes I see attorneys that own their own practices make is failing to properly incentivize associate attorneys. The primary way I have done this successfully for many years is through monthly bonuses. Whereas attorney bonuses are usually purely discretionary and undefined in advance as to their amount and frequency, the bonus system that I have developed is based on a clearly defined formula. By utilizing monthly bonuses, you will not only make your associate attorneys more productive (by keeping their focus on producing the revenue necessary for your firm to consistently make a profit), but you will also do a better job of keeping your associate attorneys with you in the long-term. Bonuses help make associates feel rewarded and recognized for their work effort and the way that I utilize bonuses is so that their total compensation, including their base salary, is hard to match anywhere else.
First Determine a Base Salary
Where I typically start in developing an associate compensation formula is with their base salary. If you don’t have a very clear understanding of what base salary is appropriate in your local area, based on the years of experience an associate has in the tasks for which they are hired, you may want to consult the Legal Salary Calculator and Salary Guides put together by Robert Half & Associates, a staffing company (see: http://www.roberthalf.com/legal/salary-calculator). I have found their surveys to be extremely useful when initially hiring, as well as advancing associates up the pay structure. Robert Half normally sets attorney compensation as a range and I like to have my associates base salary be about low to middle range. This way, when they achieve their revenue goals and get bonuses, their total compensation will drive them to the high-end of the range or hopefully beyond the range (because they will be making the firm a lot more money, too!).
Calculating the Bonus Formula
The sticky part of creating a bonus formula for associates is where to set the bar in terms of the minimum revenue that each associate must generate (actually be received) each month before bonuses kick in. It starts by looking at your monthly firm expenses. It always shocks me how few attorneys even know exactly what the monthly “nut” they have to crack is. Once you have this number, you need to add in a salary for you as the owner, a savings reserve for months with unusual expenses and a reserve for bonuses (that we will back into once the bonus formula has been set).
Let’s demonstrate how this works with some numbers. Let’s assume that your monthly expenses – – both recurring and a pro rata allocation of known, non-recurring expenses – – total $80,000 a month. Let’s assume that you want to take home a salary of at least $20,000 a month. And let’s establish a savings reserve of $10,000 a month (10% of $100,000). This now takes your monthly “nut” up to $110,000. Then, you must look at the amount of revenue that you and each associate attorney can reasonably make in order to meet that minimum goal of $110,000. Let’s say that you are able to generate $50,000 a month and have two associates, who should each reasonably generate $30,000 a month. Once an associate has hit the monthly revenue goal of $30,000, that associate would be entitled to a bonus of a percentage of the revenue in excess of the $30,000 monthly revenue goal. For example, if one of the associates generated $40,000 in a given month, they would get 10% of $10,000 (or $1,000) in the form of a bonus for that month. Now assuming that each of the two associate attorneys brings in $40,000 in a month and each gets a bonus of $1,000; we would now add that $2,000 to the monthly “nut”, so that it now totals $112,000; and you may (at some point in the future) readjust the associates’ minimum revenue goal to $31,000.
When determining the monthly revenue goal for each associate, look at what your revenue production has been in the past between you and your associate attorneys. Then, set a reasonable monthly goal for your associates, keeping in mind that it should be more than what they are currently producing on a regular basis, as you only want to bonus them for doing better! Sometimes, determining what each associate’s minimum monthly revenue goal should be before their bonus kicks in is difficult, because associates may have different types of tasks or roles within the firm, based on their skills and areas of expertise. You might have an attorney associate that is better at taking initial meetings and “closing” the client, so they hold more of those initial meetings. Or, you might have one that does the document signing with the client. Or, you might have an associate attorney with the responsibility of drafting the documents and/or reviewing the file. So, you may have to assign some perecentage of the total revenue on a matter between associates if they only handle a portion of the work (in most cases, the biggest portion going to the one who obtains the engagement). You might have associate attorneys that work on tasks that, by nature, are bigger ticket items, such as trust administration, probate, trust litigation, asset protection or advanced-level estate tax planning cases. You may have to set the bar much higher for those associates. Again, I would look back at the average typical monthly revenue generation by each associate attorney to help you gauge what their minimum monthly revenue goal should be.
Have Some Objections or Concerns?
Still don’t believe in some sort of a monthly bonus program for attorneys? Or, are you worried that your formula might not work out right and you might wind up paying bonuses when your firm is upside down in a particular month? Then, let me address these two common objections.
I, too, had my doubts about utilizing bonuses on a monthly basis for my associate attorneys based on their revenue or “sales”. After all, lawyers are professionals, not salesmen! I know that a lot of firms will give a year-end bonus based on some kind of formula that is rarely communicated clearly and often not promised to be a specific amount. But, this idea of a monthly formula was completely shocking to me and alien to the way I was used to attorneys being compensated. My business coach, David Giuliano, told me over and over for years: “Phil, attorneys are salespeople – – whether they like to realize it or not. And, the best way to compensate and incentivize salespeople is through production bonuses.” So, I finally caved in and tried a bonus formula.
And here’s the interesting result that occurred.
At the time, I had four associate attorneys and only one of them had ever hit the minimum monthly revenue requirement I set in order to receive a bonus. In the very first month that I instituted the bonus program, three out of the four associate attorneys hit their goal and received bonuses! And since then, which has now been close to 10 years, my associate attorneys regularly meet their production requirements (at least ten months out of the year). So, believe me, it works!
Now, as to the concern about being upside down in months when your associate attorneys might receive a bonus, I have figured out a way to address this issue in my own firm. I once had a couple of months where I paid bonuses to several attorneys when the firm did not have a net profit. This was due to a number of factors, including some extraordinary expenses, the calendar being weighted in the favor of one lawyer or another, and the fact that certain revenue sources for the firm were doing better or worse due to the market and law changes. When I first communicated the bonus formula (and you should too), you need to indicate that you have the discretion to change or discontinue the bonus program at any time – – prospectively only. That means that if you are currently in the month of January and you decide to modify or suspend it, this change cannot go into effect until the month of February. This way, everyone is treated fairly. When I have had to radically reduce or even suspend bonus formulas, I have communicated the reasons why to the associate attorneys and promised them that once the firm had become profitable by a certain amount (or I had made up any loss due to prior bonuses being paid), that I would not only reinstate the bonus program, but go back and retroactively pay them any bonuses that they may have earned prior to suspending the bonus program. This helped to keep the associate attorneys motivated and incentivized to continue to work towards hitting their monthly revenue goals or more. Keep in mind, this may not always be the best option, as you might determine that you may also need to adjust the bonus formula before reinstating and retroactively paying any bonuses.
My point is that this bonus program is not locked in concrete and you have an opportunity to test it and make it work properly so that everyone is happy.
One Final Tip: Bonusing Support Staff
One final tip here towards successfully compensating and incentivizing associate attorneys is that we also bonus our support staff based on total monthly revenue production by the firm as a whole. How our firm does this (within the bounds of our professional ethics rules, of course) is the topic of my newsletter article next month. But this final tip is important to the success of your firm as a whole, because it keeps all of your employees – – associate attorneys and support staff – – motivated and incentivized to work together to achieve the firm’s goals each month. This creates a group effect amongst all of the employees. I cannot tell you how many times we get down to the last week of the month and it doesn’t look like we will hit our goal, but the support staff and attorneys all come together and make it happen. The attorneys don’t want to let anyone down and the support staff will jump in and help where they can so the attorneys achieve their goals. And with this set up, not only do the associate attorneys and the firm benefit, but the staff does too! It’s a win-win for everyone!
In closing, I will tell you that it is an absolute pleasure to see how high your associate can jump when you set goals and incentives properly and to observe the overall gratification they (and you) enjoy in achieving these goals on a monthly basis!
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ABOUT THE AUTHOR
Philip J. Kavesh is the principal of one of the largest estate planning firms in California – – Kavesh, Minor and Otis – – now in its 33rd year of business. He is also the President of The Ultimate Estate Planner, Inc., which provides a variety of technical training, marketing and practice-building products and services for estate planning professionals. If you would like more information or have a question for him, he can be reached at phil@ultimateestateplanner.com or by phone at 1-866-754-6477.