Getting bonus schemes right
Bonus schemes for business services professionals have become commonplace. According to our 2014 Law Firm Salary and Benefits Benchmarking Survey, no fewer than 82% of the firms polled are now operating a bonus scheme for business services roles, with 76% of those basing the amounts on how far firm-wide and individual objectives are achieved.
It sounds straightforward enough. But the data masks the real complexity of making such bonus schemes work. For the truth is that when it comes to bonus schemes for business services professionals, few law firms would claim that they have so far got it right. As Charlie Keeling, Global HR Director at Clyde & Co, puts it, ‘If you don’t have a bonus scheme, you’ve got a problem; if you do have a bonus scheme, you’ve got a problem. It’s just a different one.’
In this feature, we seek to understand the challenges faced by firms implementing consistent bonus schemes across business services functions, and in so doing provide some insights into how firms can address the obstacles to deliver bonus schemes that help attract and retain the best business talent from both within and beyond the legal sector.
The problem with business services
It is clear that there are unique obstacles to devising and implementing bonus structures for business services professionals in law. ‘The main challenge compared to setting up a bonus scheme for fee earners is the sheer variety of what you’re asking business services professionals to do,’ says Jennifer Emery, Director of People at CMS Cameron McKenna. ‘There a tension between wanting to reward behaviour that is about everyone driving in the same direction – and at the same time wanting them to do different things. What benchmarks do you set and how do you ensure they are fair? How do you compare, say, HR with business development?’
Keeling agrees. ‘With lawyers it’s easier – you can look at fees billed divided by salary and if it’s about 3:1 then you know that’s good,’ he says. ‘But with business services professionals it’s harder to determine measurable objectives that give you a robust process for deciding whether someone gets all or half or no bonus, or whatever it might be.’
The shadow equity approach
At CMS Cameron McKenna the solution has been to implement a ‘shadow equity’ bonus scheme for more senior business services professionals. The firm already pays out a small firm-wide profit-related bonus to all staff at all levels, dependent on whether the firm meets its financial targets. But in addition to that, business services directors and those in ‘heads of’ roles can secure a further bonus, determined by the number of shadow equity points they each hold – the longer they serve the more they get.
‘It gives senior people skin in the game in terms of the performance of the business, providing a feel-good factor in that work you’re doing can and should contribute to the profitability of the business,’ says Emery. ‘It’s a good way of motivating people as it makes you feel that your work makes a difference.’
The major advantage too is that it doesn’t distinguish between the different business services functions so bypassing the challenges of benchmarking such diverse roles. This, Emery thinks, helps drive more collegiate behaviour. ‘It takes away the politicking and jostling for position, encouraging instead team behaviour and the cross fertilisation of ideas’ she says. ‘And most projects involve more than one [director]. The notion that at bonus time I would try and claim any one project over that of another director is horrid.’
There’s a beauty in the simplicity of this kind of scheme. Emery says that potential recruits are attracted to the equity link too. But for a growing number of firms, it may not offer a strong enough link between individual performance and reward. A business services director could in theory, for example, receive the highest bonus purely by dint of the time he or she has served with the firm – rather than any direct contribution he or she has made to the firm in any one year.
The drive to performance pay
In contrast, and in support of our own research in this area, Moira Slape, HR Director at Eversheds, has seen a shift among firms towards a more flexible approach – paying an inflationary salary and then using a variable performance-based bonus for the rest of the compensation. ‘Law firms are using much more specific and explicit links to appraisal ratings to make the right bonus decisions,’ she says. ‘So if someone gets a rating that is below what average performance looks like then they are immediately in a camp where they can’t get a bonus.’
This brings us straight back, though, to the thorny issue of determining what average or exceptional performance across business services should look like. This would not necessarily be an issue for business services directors – as Johnny Nichols, HR Director at Bird & Bird, says, ‘we run our business services functions like corporates so we’re used to performance managing our staff’. But getting partner buy-in is much harder. ‘Lawyers are used to having a fairly standardised set of metrics such as fees billed/utilisation, and so on,’ says Nichols. ‘Other metrics around behaviour are far more difficult.’
In particular, he thinks partners struggle to understand that bonus payments for business services staff need to be part of an on-going dialogue on performance. Partners want proof that bonuses are deserved and that they’re not just a part of standard remuneration – and yet in business services roles, he says, the business benefits are not always direct. ‘It’s easier to recognise good performance from the billing or credit control team but less easy to see the benefit from someone in the IT team consistently doing a good job that goes beyond the usual expectations of their role.’
The irony is that in trying (and failing) to recognise and reward outstanding performance firms end up doing just what they were seeking to avoid: making bonuses just another form of basic pay. Worse, Slape argues, they end up giving ‘double whammy’ pay rises through both the base salary and bonus – and sometimes just to keep a few already overpaid (and expectant) team members happy. ‘We need to be able to educate and equip managers to tackle quite difficult conversations around pay and to use the bonus to reward performance – instead of using it as another means to pay people more. It’s about resolving conflicting pay strategies that are not compatible with how firms should be paying bonuses.’
This will also require effective communication skills, adds Slape, to manage expectations right from the start so that staff understand what bonuses they are realistically likely to get rather than setting them up to expect some ‘impossible dream’ – that firms then feel obliged to try and wriggle their way around.
For Keeling the way forwards must be clear objective-based bonuses. ‘Firms should only be trying to apply bonus arrangements with more senior level business services managers because with them you have the best chance of setting some objectives that you can then measure someone against,’ he says. ‘You’ve got to start with a one-year view of the future. What is it that you want this individual and team to achieve? Are there key projects to undertake or team milestones that you need them to meet? And the objectives have to be SMART – so are they specific, measurable, achievable, recordable and time based?’
Nichols agrees, arguing that to improve bonus schemes for business services professionals, there needs to be clarity over firm objectives, which then flow down to individual or team objectives. Firms also need to be agile enough, he says, ‘to recognise (and reward) fluid team performance’.
For the moment, however, it appears that this is easier said than done. For the majority of firms, bonus schemes for business services professionals are popular but still very much a work in progress. According to research Keeling has recently conducted with 15 firms on their business services bonus schemes, nearly all (14) use individual performance ratings to agree the percentages paid. But only three of those claim to also use an individual objectives-based bonus to allocate amounts. No wonder then that he thinks that the vast majority are relying on gut instinct when it comes to appraising and rewarding their best.
In the short term, perhaps this isn’t even a problem. As long as bonus amounts are generally competitive and meet market expectations, then they will likely do their job in satisfying the requirements of talented candidates. The danger is that firms are storing up serious problems for themselves in the long term – creating burdensome bonus schemes that at best just end up becoming another form of basic and pretty rigid remuneration that does nothing to drive the right behaviours. At worst schemes will be so opaque as to engender suspicion and resentment as staff struggle to understand the rationale behind bonus decisions.
The sheer diversity of business services roles makes this a particularly tough nut to crack. But with the vast majority of firms heading down the bonus path for business services professionals, it’s one that firms need to tackle sooner rather than later. And for the firms that do get it right there is a major opportunity: to drive better performance while establishing a reputation for genuine employee satisfaction among the most talented business professionals in the sector.