Law Firm Associate Compensation – Bonuses Based on Hours or Dollars?

Question:

Our firm is an eight-lawyer insurance defense firm in Chicago. We represent insurance companies across the ChicagoLand area representing their insured’s in personal injury cases. Our clients are billed by the hour and we have a wide range of hourly rates based upon the client, type of matter, who is working on the case, etc. We have three equity partners and five associates working in the firm. Currently all of the associates are paid a straight salary and a discretionary bonus. We are having issues with our associates not putting in the billable hours that we need them to be putting in. We would like to put in a bonus system to motivate them to increase their billable hours. Should we focus on hours or collected dollars? Your suggestions would be most welcomed.

Response:

Both approaches – hours and collected fees are used in many law firms and I prefer collected fees when they are workable for the firm. Usually the focus is on working attorney fee collections but can also include a client origination and sometimes a responsible attorney (delegation component). However, in insurance defense firms this is often not workable due to the wide range of hourly rates and the potential unfairness for associates that are assigned to lower hourly rate client matters. Most insurance defense firms that I have worked with either pay associates a salary plus discretionary bonus or salary plus a bonus based upon adjusted billable hours that are actually billed to clients after a certain billable hour threshold is reached. For example:

A flat bonus if the billable hour expectation is reached during the year – often 1800 billable hours actually billed to clients. For example, $5000.00.
A flat bonus if the billable hour expectation is reached during the year (1800 hours) and a per hour bonus for all billable hours billed to clients over 1800.

Many firms breakdown the expectation in to a quarterly or monthly expectation and pay bonuses on a monthly or quarterly basis.

Make sure that your associates don’t game and milk hours. Advise them that the bonuses will be based on hours after write-downs or adjustments. In other words hours that are approved by the billing partner and are billed to clients.

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John W. Olmstead, MBA, Ph.D, CMC

Posted at 09:28 AM in Compensation

Aug 25, 2021

Law Firm Associate Compensation – Bonuses Based on Hours or Dollars?

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