An increasing number of law firms are taking stock of the strategic role incentive plans play. Bill Cohen and Jon Clark look at the various schemes on offer, and assess what they are trying to achieve




The recruitment and retention of high-calibre associates has become increasingly challenging at the City end of the legal market.

The lure of investment banks and in-house roles leave law firms in a difficult position. UK firms also face the threat from US practices offering higher salaries and bonuses. A typical response has been to increase the financial incentives available.



There has been a particular focus on law firm bonuses in recent months, coinciding with a number of high-profile firms introducing new arrangements. Deloitte surveyed 43 leading law firms on their use of incentive plans. The results give a snapshot of current practice and an indication of future changes.



With around three-quarters of respondents operating some form of bonus arrangement for employees, there appears to be a clear aspiration that incentives be used as a key tool in meeting talent management challenges. Well-designed incentives can play a major role in motivating staff to deliver financial growth objectives, and attracting and retaining key talent.



In identifying how incentive plans can positively impact a firm's performance, it is important to understand what behaviours a firm is seeking to engender. For instance, plans can be designed to drive high productivity behaviours through challenging chargeable hours targets, or a balanced contribution through a broader set of bonus plan drivers.



Reward strategy



Whilst around 75% of firms surveyed operate a bonus scheme, around 50% stated that incentive arrangements are either 'not important' or 'quite important'. This suggests that, in many cases, incentive arrangements are not delivering value for money.



The most important purpose of incentive plans was identified as to either motivate or reward employees, as opposed to attracting or retaining talent. In the top 25 law firms, the motivation of staff to drive future performance was identified by a significant majority as the most important purpose, demonstrating the desire to ensure that incentives support such firms' wider strategic and financial objectives.



Types of incentive plans



Broadly, three types of plan were identified from the survey.

l 'Umbrella plans': Typically firm-wide plans, operating on the basis of a fixed payout, subject to the achievement of a firm-wide financial target. Open to all.

l 'Fee-earner plans': Typically linked to fee-earner productivity (such as chargeable hours) and utilisation targets. Generally open to all associate-level fee-earners; however, they may be restricted to different fee-earner categories (such as a specified level of post-qualification experience).

l 'Support-staff plans': Commonly operated in conjunction with fee-earner plans and typically linked to a nominations or appraisal process.



Of the firms operating fee-earner plans, the majority have introduced these in the last two to three years, reflecting a growing trend towards this type of plan. Nearly all fee-earner plans use individual chargeable hours, linked to a financial underpin, as the principal performance driver.



The most common minimum chargeable hours target is 1,500 hours a year, although it can range between 1,300 and 1,700 hours, with a number of firms offering higher reward for up to 2,500 hours.



A chargeable hours target is typically combined with a broad assessment of overall performance or additional individual contributions. These contributions will usually be assessed on a discretionary basis and may comprise both quantitative measures (such as work-in-progress management) as well as personal measures (such as business development).



A smaller number of firms described bonus plans designed for support staff only. The disclosure of how these operate was limited, reflecting the reality that such plans often operate on a discretionary basis with limited transparency.



Levels of incentive



Potential levels of reward differ by plan type, with higher levels of reward typically being delivered under fee-earner arrangements.



Umbrella arrangements generally deliver a flat rate of up to a maximum of 10% of salary (although actual payouts are typically less than this). Fee-earner arrangements have increasingly competitive payout opportunities, with normally up to 10% of salary for on-target performance and up to 20% of salary for maximum performance.



A small number of firms - primarily in the top 20 - disclose maximum opportunities in excess of this level, with the highest performers able to earn up to 40% of salary in exceptional circumstances. We are also aware of two firms introducing bonus arrangements which deliver up to 75% of salary. These levels of bonus opportunity are potentially significant in the context of overall reward.



The way forward



The survey offers some pointers for the way forward. Firstly, bonus plans need to be seen in the context of wider reward. On their own they cannot drive recruitment and retention success, but they can make a significant contribution.



Secondly, bonus payout opportunity is increasing, but the individual contribution required to achieve a higher payout is also increasing, not in terms of chargeable hours, but in terms of wider contribution. Staff need to understand the value of the opportunity and there needs to be differentiation to reflect individual contribution for plans to be effective.



There are clear indications that firms are taking stock of the strategic role incentive plans play. Respondents indicated almost half of the plans reported are being reviewed or are scheduled to be reviewed.



The purpose of a review is to increase potential payouts, individual stretch - for instance, broadening targets beyond chargeable hours - and the contribution of the plan to the firm's performance.



Bill Cohen is a partner and Jon Clark (pictured) a senior manager in the executive remuneration team at Deloitte