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MANAGING CHANGE: HOW LAW FIRMS ARE ANSWERING THE WAKE-UP CALL

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It’s Bonus Time! Rewarding Top Performers With Innovative Incentive Programs

Go ahead. Just try to talk to law firm leaders about money these days, especially associate compensation. You may not get very far as they tend to be a bit reticent, to say the least. But -really, can you blame them? After all, huge headlines in the legal press and blog- shout out the bad news that law firms are lowering -associates’ base pay and freezing bonus packages. Often critics depict these moves as being not just lean but downright mean. So some firm leaders don’t want to be associated with anything surrounding this -issue for fear of having their partnerships’ reputations tarnished.

“Collectively, bonuses and compensation is tinder waiting for gasoline to be poured on it and a match to strike it, and I don’t want to be either the gas or the match,” says a chair of a major national law firm, who asked for anonymity. “Law firms are businesses and we’re doing what we have to do. And yet firms and their leaders are vilified and improper motives are imputed to them. I just don’t want to be heard on it. When you Google [his name], I don’t want to see my name attached to this subject.”

His response is typical of other chairs and managing partners, if they respond at all. (In fact, several C-suite leaders failed to return phone calls when they learned that bonuses were the subject of inquiry.) And with the thousands of lawyer layoffs that have occurred this year, many partners feel that associates should be happy simply to be employed.

“The bonus that many firm leaders give their people these days seems to be that their associates still have jobs: ‘Congratulations, you’ve been awarded another week of employment,’” says Jonathan Lindsey, a principal at Major, Lindsey & Africa, the world’s largest legal search firm. “They used to be called boom-year bonuses, and I don’t think this has been a boom year, to put it mildly.”

Still, even in—or especially in—these tight economic times, there are firm leaders who remain positive about bonuses because they know well the benefits that bonuses continue to bring to their firm’s bottom line.

It’s About Merits, Productivity and Creativity

Increasingly over the past decade, more firms have turned to bonus structures to reward their top performers—a trend that started in the mid-1990s but really gained speed in the past two years. Now many of those that have bonus systems in place are realizing the advantages when it comes to motivating performance and retaining top talent, things that are especially important during the current recessionary cycle. Those firms that instead rely primarily on salary to compensate their lawyers, on the other hand, may wish they had bonus structures, too.

“When you get into a time like this, if you’re overpaying people on the salary side, you don’t have bonus money left to take care of the big producers,” says Ward Bower, a principal of Altman Weil, who consults on strategy and compensation issues and is a strong proponent of bonuses. “A number of firms are in this position. And that’s what’s driving some of the associate salary cuts—the need to create enough profit to enable bonuses to go to the people who are really driving the economic engine. The smart firms realize that bonuses can be very effective.”

So what constitutes effective bonuses? Well, first of all, it’s not making them automatic. Just as a growing number of firms have eliminated the lockstep salary system, so too have the strategically sagacious ones cut lockstep bonus packages.

“The important thing about bonuses is that they should not be simply expected every single year; they shouldn’t be considered an entitlement,” says law firm management consultant Robert W. Denney. “They must be earned based on merit, on stellar performance. That’s when they enhance productivity.”

“Merit” seems to be the operative criterion for law firms today. Early this year, as just one example, Philadelphia’s megafirm Morgan Lewis & Bockius replaced its 2,000-billable-hour requirement for associate bonuses with a merit-based system. It’s now one that takes many different contributions into consideration, such as efficient service to clients and participation in the firm’s programs and management.

Morgan Lewis’s conversion seems to mirror an approach that others have taken as well, in which creativity, rather than conformity, comes into play when handing out non-salary rewards. For example, New York’s Cadwalader Wickersham & Taft provides free professional counseling services; other partnerships have instituted vacation and travel bonuses; and some firms are showing lawyers their appreciation by tickling their taste buds. Pittsburgh’s Reed Smith serves up healthy snacks, for example, while Philadelphia-based Dechert offers its associates all the fruit they can eat. And several firms dole out free caffeine, including the international giant Clifford Chance, which does so in the form of Starbucks in the morning, but then—going one step further—it also serves double scotch on the house (and presumably on the rocks) at the end of the workday.

But cash still talks, particularly in tight economic times, so monetary rewards remain the centerpiece of the most successful bonus programs. Here are snapshots of two successful, innovative monetary bonus programs—one from a 400-lawyer partnership on the East Coast and another from a five-attorney firm on the West Coast—neither of which, it’s worth noting, has taken a serious hit in the recession.

“Real Money”: A Trailblazer in the Bonus Round

Dickstein Shapiro, which has offices in Washington, D.C., and New York, has been a pioneer in many law firm management areas. In 2000, for example, it became one of the first major firms to toss its lockstep formula for compensation, replacing it with a value-based system while also launching a merit-centered bonus program.

According to Michael Nannes, the firm’s chair, associates who perform at levels above and beyond the call of duty receive an extra $10,000 to $50,000 (in a good year). And on rare occasions, when an associate brings in a major client or has worked on an important case that demanded many a weekend of service, she has earned a six-figure bonus. “We pay real money,” Nannes says. “I’m always glad to pay the best.”

While the firm’s associate evaluation committee (AEC) obviously looks at the number of hours younger lawyers bill, committee members also consider other kinds of factors. “We look at many different things at the end of the year,” Nannes says. “A person at level one could have gotten shoveled with a level of responsibility that was particularly high relative to his or her placement. Or perhaps an associate was in a practice area that was heavily in demand that year, one that demanded higher rates. This year, we had an associate argue a case before the Supreme Court. That’s pretty cool. That’s a good year.”

Nannes says he’s partial to what the firm calls its “firm-building bonuses,” which are awarded to those who work diligently on several committees or perform a lot of client development work or conduct many hours of pro bono service. “These are all things that make the firm a better place,” he points out.

Associates get to state their case, too—they submit self-evaluations toward the end of the year, articulating the contributions they believe they’ve made to the firm. The AEC members also solicit input from associates’ supervisors as part of the extensive assessment process. And Nannes has been known to make a recommendation or two when he thinks a lawyer is worthy of some extra cash. “If a client wrote a letter praising an attorney, I’ll forward it along to the committee,” he says. “Currently, we have a person who has taken the initiative to get associates to contribute money to the District’s Legal Aid Society. I’m going to make sure that the committee knows about this firm- and community-building effort.”

The firm’s younger lawyers aren’t the only ones who receive bonuses, of course. Like most firms, Dickstein has a system to reward partners, too. But unlike most firms, the partnership also launched a unique incentive program that rewards efforts to grow the firm’s culture of inclusion. In every one of the past four years, management has asked the firm’s diversity committee to identify a partner who they think has done the most to advance diversity within the firm, and that partner receives a diversity bonus.

Still, most bonuses go to associates, and at least one of them—a very coveted one at that—isn’t cash-based. “In our bonus system, we have a recognition component; it’s not just money all the time,” Nannes says in discussing the Justin D. Simon Core Values Award.

Simon was a partner at the firm who died in 2001 and was known for, among other things, his commitment to Dickstein’s core values. Since 2002, a non-partner who has demonstrated similar commitments receives the honorary award, which comes with a book of remembrances about Simon, a gift certificate, an endowment of $1,000 to the charity of his or her choice and the intangible but ever-important firmwide recognition.

“When we have given that award, a good percentage of the recipients have their eyes water up as they address their colleagues,” Nannes reports. “These are people who do important things and are not looking for recognition. When they receive the award, they’re heartened. I’ve gotten notes [that say], ‘Big law does not have to be that bad. I feel very good about what I’m doing.’ It’s a very special form of bonus.”

Transparent and Equal Access for the Entire Team

The small town of Hood River, Oregon, is known for its spectacular location in the shadow of Mt. Hood and on the dramatic Columbia River Gorge, the sport of windsurfing and its laid-back attitude. It’s also a community where Teunis Wyers and his law firm Wyers Haskell Davies are well-known, and where his colorful personality and easy-going approach to the practice of law fit right in.

“I’ve always felt strongly that if I worked smarter, I’d be paid more and work less than the lawyers who pay less attention to the management of the firm,” Wyers says. “Ever since I graduated from law school, my goal has been to practice law to live, not to live to practice law.”

Wyers is the principal shareholder of the firm, which his father founded more than 80 years ago. But he also wants the firm’s four other lawyers and three staff members to have a solid sense of ownership and fully realize how integral they are to the firm’s success. Consequently, as firm leader, he relies heavily on a generous bonus system that rewards hard, and smart, work—even for the staff. And that’s a rarity in the profession.

“I want job satisfaction for everyone, staff included, and I want everyone to feel they’re being treated fairly,” he says. “That sounds kind of schmaltzy. But we really are all a team here, and the bonuses help us maintain that teamwork. If we all have a stake in what each other makes, then everyone’s quality of life and income is enhanced.”

One important feature of the firm’s bonus structure is its transparency, which helps enhance the collaboration and cohesion. “The employees have access to all the important information that bears on their success in their jobs,” Wyers says.

“This is the first bonus structure I’ve come across that has such transparency,” says Sheila Blackford, a practice management advisor for the Professional Liability Fund of the Oregon State Bar. “Usually law firms are hush-hush about their bonus structures. But Wyers is very open about it and makes sure that all of the employees are aware of it. It helps keep people enthusiastic to perform.”

Although the incentive program has been in place since the 1990s, the shareholders reshaped it in 2003, giving it greater complexity in its methodology to fold a wide range of determining factors into the system while enhancing its equality for all employees. And two of its other atypical but related features center on what Wyers proudly calls its “predictability” and its calculation timetable, under which the measurements of the bonuses are done quarterly.

“It’s predictable in terms that the entitlement to a bonus is measurable,” he explains, “so you don’t have a boss who at Christmas time is deciding who’s going to get a bonus based on who showed the most cleavage and who was the most ingratiating and all those other horrible ways of measuring access to pay.”

Happily reporting that the economic downturn hasn’t diminished the firm’s workload, Wyers continues to see how the extra cash motivates the firm’s team to perform to its best. “I can go away for 10 days and come back and there’s nothing that needs cleaned up around here,” he says. “This firm can run for a hell of a long time without me here. That’s a testament to our management structure and the bonuses are a large part of that.”

It seems it’s also a testament to using bonus money to increase production and reward performance while also serving to share the wealth—and that’s a winning combination.

About the Author

Steven T. Taylor is an award-winning freelance journalist living in Portland, OR, who writes on various subjects in the legal media.

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