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More on Law Firm Bonuses:
Eugene links below to Saul Levmore's post on law firm bonuses, and I wanted to add a thought: I would think firms structure compensation that way because most applicants for biglaw associate positions have little information about firms and an uncertain commitment toward making partner.

  The lack of information about firms makes many applicants unusually sensitive to the very clear and measurable salary numbers. You may not know if you'll like one bigfirm over another, but you know that "160" is a higher number than "145." At the same time, once an associate has signed on, he or she may not have a clear incentive to be a top performer. Big firms often make very few partners, and the partner track is a decade long. In that environment, the promise of a financial reward for working hard and doing well may really influence an associate's willingness to bill all those extra hours.

  From the firm's standpoint, then, you would want to distribute compensation between salaries and bonuses. Put too much compensation into the bonus and it's harder to reach job applicants who may be unsure of the compensation package; put too much into the salary and you remove part of the incentive to keep billing. That's my guess, at least; I don't claim to have any remote expertise in this area, and I would assume it's the subject of a broad literature.

  UPDATE: Commenter "Patrick216" makes an interesting argument about bonuses and associate retention here.
CDU (mail):
The question is, do law firm bonuses really reflect associate performance, or does the firm just give almost everyone the same amount?
12.4.2007 1:54pm
Patrick216:
I would think associate retention has a lot to do with it. I practice in a MIDLAW environment (Amlaw200 firm), so my experience may differ from that of NY/DC/LA BIGLAW, but from what I see, most junior and midlevel associates have comparatively little control over their billable hours. I (a midlevel) have some control over my hours, to the extent that I can simply be more or less aggressive about seeking new case assignments, but if a partner asks me to do something, or a case I'm working on suddenly gets hot, it's not like I can say "no, give it to the associate down the hall."

My very long winded point is that I believe bonuses don't so much encourage associates to bill 2300 hours instead of 2000 hours, as they encourage the associates who bill 2300 hours to stick around. Trust me, when you've billed 200 hour months and you see associates skating around billing 165 hours a month and getting paid the same as you, it makes you angry. (And the reasons why some associates may bill 165 vs 200 in a month may range from random happenstance, to difference in associate quality, to differences in performance expectations and workload from one department to another.)
12.4.2007 2:29pm
Houston Lawyer:
Just to reiterate what Patrick said, firms should pay bonuses based upon performance. Associates who are working hard resent those who do not work as hard and are equally well compensated. The hard working associates will ultimately resent the firm for paying the same to performers and nonperformers alike.
12.4.2007 2:33pm
AF:
I don't see the "puzzle," since as Levmore says "[t]here is nothing wrong with the conventional explanations."
12.4.2007 2:35pm
GV_:
I think most west coast and southern firms tether your bonus to how many hours you worked. The east cost (namely, D.C. and N.Y.) have a one size fits all bonus. There is no industry-wide standard.
12.4.2007 2:41pm
Virginian:
I worked for an AmLaw 100 firm in the Southeast that tied bonuses to hours worked (X% for 1900 hours, Y% for 2000 hours, Z% for 2100 hours). But the percentages were laughably low and did not provide much motivation to bust your butt.
12.4.2007 2:54pm
Earnest Iconoclast (mail) (www):
It would be nice if lawyers weren't graded on how slow they worked... shouldn't there be some kind of compensation based on succesfully winning a case? As a customer, I wouldn't be too thrilled to know that my lawyer was getting paid by the hour with bonuses for working even more hours.

I guess the "product" that law firms produce is billable hours?

EI
12.4.2007 3:10pm
Phillip (mail):
Unfortunately, I doubt that it's the subject of "broad literature." Firms keep this sort of information notoriously close to their chests. And I'm skeptical that their decision is even as remotely rational as you suggest.

Having some business background, I am routinely astounded by the lack of rationality when it comes to compensation. Unlike their business counterparts, firms have no overarching philosophy of compensation. This is caused, at least in part, by the lack of available quantitative data and substantive study. Firms do not realize that a well-orchestrated compensation structure truly adds value to a firm. Instead, they tend to think of compensation on an ad hoc basis, with no underlying guidance on how to make those decisions.
12.4.2007 3:10pm
zooba:
I think from a purely psychological point, salary tends to be downwardly sticky (i.e. If a law firm actually reduces salaries, it looks very bad and they will stand out because, as you said salaries are advertised). However, bonuses are not downwardly sticky, because they are not formally advertised and there is no promise of a particular bonus ahead of time, which is why bonuses are still down in real numbers from 2000. In large part, the bonus structure is designed to allow firms to adjust total compensation to current economic conditions and avoid the general tendency of wages to be downwardly sticky.

This is probably a better explanation than performance when you look at the practices of top NY law firms which do not have hours requirements for bonuses.
12.4.2007 3:14pm
Westie:
Our firm negates the resentment against loafers by paying everyone based on how much they work.
Wanna make a ton of money? Work more. No need to be sore that someone else is working less and making the same; they'll just make less (and likely be happy doing it, since it's awfully easy to make $150k per year).
12.4.2007 3:15pm
David M. Nieporent (www):
It would be nice if lawyers weren't graded on how slow they worked... shouldn't there be some kind of compensation based on succesfully winning a case?
Putting aside that not all lawyers are on the litigation side, junior associates don't generally have a lot of control over whether a case is won.
12.4.2007 3:53pm
Earnest Iconoclast (mail) (www):
My point still stands, though... isn't a lawyer who is billable generally trying to accomplish something other than just passing the time? Paying bonuses based on time worked is an incentive to work longer hours, not work efficiently.

I've worked at a company where we billed clients for hours and got paid for overtime work and the pressure to bill hours was significant and, I felt, a little perverse.

I've also worked at companies where we got paid a salary with bonuses based on company performance (deliveries, completed projects, profit, etc...). That feels much better.

EI
12.4.2007 3:59pm
Anthony A (mail):
I work in a firm where my billable hours are recorded, and mostly our product is billable hours, but it's not law - I'm an engineer.

I don't know how law firm clients are, but I do know that some of our clients spend an enormous amount of time going over our invoices, and a few will argue over petty amounts - we've had clients argue over $200 in a $100k project.

Do sophisticated law clients do this, too?
12.4.2007 4:14pm
Just Dropping By (mail):
Do sophisticated law clients do this, too?

Yes. In my experience (which is limited to litigation) it's very rare for a client to ever have to pay the full amount that the number of billed hours would call for. Part of the time usually gets written off in advance before the bill even goes out (and high-volume clients will typically have an automatic 10 to 30% write-off in addition to whatever the partners decide to deduct) and then quite a few clients will request additional write-offs for specific things they thought they were overcharged for.
12.4.2007 4:22pm
erics (mail):
Maybe I need to spend more time by the water cooler. How does an associate billing 200 hours a month know his neighbor billed only 167, especially considering that on any given day the attorneys in my office are traveling, telecommuting, and/or shuffling to and from court?
12.4.2007 4:25pm
Salguod:
I'm a biglaw associate in NYC, heading into my third year.

The referenced post and this post both miss a key factor: law firms are not just competing against other firms, but are competing against other types of employment. While law firm salaries and bonuses may seem outrageous, they are much lower than those in investment banking, even in a so-so year.

Folks who go into biglaw legal practice are typically very risk averse. As others have commented, you don't necessarily have a lot of control over workflow, regardless of whether you're junior or senior.

It's also hard (not impossible, but hard) to evaluate someone in a meaningful way when they are a junior associate. More importantly, it's not at all clear that the skillset and abilities that make for a good junior associate are well correlated with the skillset and abilities that make for a good senior associate.

Being a junior associate is in substantial part an elaborate hazing ritual. You need to make it through the experience in one piece, but being a super-duper document review grinder just isn't a good predictor of the judgment and people skills needed to be a great senior associate.

The biglaw lockstep bonus system is a way of providing risk-averse associates with enough of an incentive to stick around in legal practice until they either prove themselves in a meaningful way (or not), which is a multi-year process. "Merit based" bonuses for junior associates would tend to gratuitously and prematurely weed out and alienate those that drew the short straw on assignments or who aren't especially good at playing the junior associate game.

As for senior associates, my understanding is that if a top-end biglaw firm doesn't think said associate is worth keeping, the firm simply encourages them to start looking for other work.
12.4.2007 4:28pm
David M. Nieporent (www):
My point still stands, though... isn't a lawyer who is billable generally trying to accomplish something other than just passing the time? Paying bonuses based on time worked is an incentive to work longer hours, not work efficiently.

I've worked at a company where we billed clients for hours and got paid for overtime work and the pressure to bill hours was significant and, I felt, a little perverse.
If the firm doesn't have enough work, then your concern is valid. But if it does, the incentives to stall to bill more hours are counterbalanced by the incentive to impress more senior people by getting things done and taking on more work.

Everyone wants to see a high number of billable hours accumulated by associates, but they also want to see associates accomplishing things.
12.4.2007 4:37pm
ElizabethN (mail):

How does an associate billing 200 hours a month know his neighbor billed only 167, especially considering that on any given day the attorneys in my office are traveling, telecommuting, and/or shuffling to and from court?

At many firms, the hours are announced publicly every month. Even when they are not, the billing software sometimes allows you to look up other associates' (or partners' numbers). Sometimes the department chair gossips. There are lots of ways to find out.
12.4.2007 4:41pm
Arvin (mail) (www):
It would be nice if lawyers weren't graded on how slow they worked... shouldn't there be some kind of compensation based on succesfully winning a case?

The problem with this is that not all cases are created equal. It could take me 500 hard hours to narrowly lose a difficult and complex $5,000,000 case, while it could take me 100 easy hours to win a slam-dunk $5,000,000 case. It might be easier to judge for the corporate side, but even there, I'd bet there are complicated mergers and easy mergers.

It's also not always true that the person who billed 2100 hours worked slower or less efficiently than the person who billed 2000. It could also be that the 2100 person worked on more cases (or more complex cases).

But ultimately, if a client is unhappy with the legal bills when viewed in relation to the product produced, the client will go elsewhere. If this happens often enough because of one or more associates, I imagine this is taken into account in raises or other compensation-related evaluations. Or the partner-in-charge will cut the hours so that the client is only billed what the partner thinks is an appropriate amount, and that, too, will probably be taken into account when evaluating an associate.
12.4.2007 4:48pm
Patrick216:
Earnest Iconoclast - the downside to your theory about billing based on "results" is that lawyers can't guarantee results. Lawyers don't sell widgets. We either litigate disputes (and from the biglaw side, that frequently means defend against lawsuits) or we document and help negotiate deals.

Plaintiffs' lawyers handle things on a contingent fee basis, and that has its upsides and downsides, too. (Likewise, there are some BIGLAW shops whose corporate departments will run M&As and IPOs on a percent-of-the-deal basis, which effectively is a contingent fee. Again, upsides &downsides.)

I'm not defending the current system nor totally dismissing an outcome-based measure; I'm just saying the problem is considerably more nuanced and vexing than I think your comment recognizes.
12.4.2007 5:30pm
visitor from Texas (mail) (www):

At many firms, the hours are announced publicly every month


I was unaware that there were firms where there were not public tallies of the hours billed or where the software did not automatically bring the information up.
12.4.2007 5:59pm
Think38 (mail):
As a person in BIGLAW, there are two primary constraints to running up the ledger to pound out more hours. First, I want less hours, not more. I'd much rather get my work done efficiently and spend time with my friends and family doing other things. Second, bills go out to clients. If you are efficient and deliver value, over time you can charge more per hour. If you are not efficient and do not deliver value, you may get away with it sometimes, but you will find the clients do not willing pay for it, or do not come back to you for their next project. The market for legal services is competitive, and most clients are pretty good at recognizing value.
12.4.2007 6:53pm
happylee:
Plaintiffs firms seem to have the value accounting down pat. Associates get a % of what they make, period. They learn to work cases wisely and choose cases wisely. The marginal cost (fees) is as important to them as the marginal benefit (damages award) to the client. Plaintiffs attorneys are thus generally a happier bunch.

In contrast, many big firms make money by billing. And billing. And billing some more. The marginal cost (fees) is pure marginal benefit for the firm; but not necessarily the client (did those 200 motions in limine do anything but piss the judge and his law clerks off?). It's like government cost-plus contracts that result in billion dollar planes or thousand dollar toilets, etc. And to keep associates in such salt mines of legal practice, a fat bonus helps keep them around -- golden chains, if you will. And if your goal is to keep the laborers in the mines, it really does not matter if you pay them equally or not.
12.4.2007 9:44pm
BillHour:
Patrick216 is right on the money. As for Zooba and the stickiness of associate salaries, read about a firm (Fish &Richardson) that did take the downward trend gere . It then vouched it had one of the best years ever to quell rumors that the cuts were necessary for it to survive. It is an interesting case study on how important bonuses are as an incentive for recruiting, work effort, work quality, and associate retention.
12.4.2007 10:17pm
Brian G (mail) (www):
I am at a 9 attorney firm and I average about 170 hours a month. I'll probably get a bonus of a few grand, and that's it. As you might guess, I don't have sympathy for the crying about the size of the bonus. Go get another job if it isn't enough.

For me, I'll take my 5-day work week and stable marriage anf family life any day over meeting some random billing requirement.
12.4.2007 11:03pm
byomtov (mail):
I see no great mystery here. Associates get bonuses for the same reason salespeople get commissions. Compensation for jobs where performance is easily measured tends to include pay directly related to performance.
12.5.2007 10:59am
Earnest Iconoclast (mail) (www):
I understand that measuring performance for many lawyers is difficult... a good laywer may lose a difficult case while a bad lawyer may win an easy one. My issue is that I don't see a good correlation between hours billed and performance unless the goal of the firm is to bill hours.

From the comments, I see that in many cases milking a client is a bad thing... so offering bonuses to associats for billing more hours while simultaneously not wanting to overbill clients presents a bit of a contradiction.

Some comments have mentioned that bonuses are not really intended to reward good performance but are intended to retain lawyers who are being abused anyway... this is probably closest to the truth.

EI
12.5.2007 4:55pm