Our Law Firm Client Wanted to Give an Associate a Bigger Bonus. We Needed to Know What the Firm Could Actually Afford.
By ProfitWise - a Visa Business Plans company
One of our law-firm clients wanted to revisit the compensation package for an associate who had become increasingly valuable to the practice.
The associate was handling more matters, bringing in substantial income and taking responsibility off the partners’ plates. The partners wanted to recognize that contribution and, just as importantly, make sure they retained someone they considered an important part of the firm’s future.
They were considering increasing the associate’s bonus and tying more of the compensation to the fees generated from the associate’s work.
Before settling on a percentage, we wanted to understand what those fees were actually contributing to the firm.
Because we handle the firm’s specialized bookkeeping, we already had a detailed picture of the expenses required to operate the practice. That gave us a much better starting point than simply looking at the associate’s salary and the revenue associated with their cases.
$600,000 in Fees Doesn’t Mean the Firm Made $600,000
Suppose an associate is responsible for matters that generate $600,000 in collected fees during the year.
It is easy to look at that number and conclude that there is plenty of room for a generous bonus. But those fees don’t come without costs.
Depending on the firm, substantial marketing expenses may have been required to acquire the clients. Paralegals, legal assistants, and administrative employees may have supported the associate’s work, and the firm still has software, insurance, office expenses, professional services, and all the other costs involved in running the practice.
The associate’s own compensation also costs more than the salary shown on the offer letter once payroll taxes and benefits are included.
We wanted the partners to understand how much the work contributed after accounting for the resources the firm needed to support it. From there, we could have a much more informed conversation about how the associate should participate financially in the results.
We Also Needed to Decide What the Bonus Was Supposed to Reward
This became an important part of the discussion because a law firm can measure an attorney’s contribution in several ways.
An associate may generate fees from clients the firm acquired and assigned to them, while another attorney may originate clients independently. Someone else may be particularly effective at resolving matters efficiently or managing a large caseload with less support.
Those contributions aren’t necessarily the same, even when the collected fees look similar.
Before building a compensation formula, the partners needed to decide what behavior they actually wanted to encourage.
If the bonus was based entirely on collected fees, we could show them how that structure would work financially. If they wanted to recognize origination differently, we could incorporate that as well. The important part was understanding how each version affected both the associate’s compensation and what remained for the firm.
Then We Tested What Would Happen if the Associate Had an Exceptional Year
This was particularly useful because compensation plans often assume expected performance.
We didn’t want to test the proposed structure only at $600,000 in fees. We could also calculate what would happen if the associate generated $750,000 or $900,000.
Would the formula still make financial sense?
If the answer changed dramatically as production increased, the partners needed to know that before committing to the structure.
The same analysis could work in the opposite direction. If collections were lower one year, would the compensation arrangement still be manageable once the associate’s base salary and the firm’s fixed costs were considered?
Looking at several scenarios allowed the partners to see how the proposed structure behaved under different circumstances instead of evaluating it based on a single good year.
The Firm’s Growth Plans Mattered Too
The partners weren’t making this decision in isolation.
They were thinking about retaining a strong associate, but also about future hires and the practice's continued growth. A compensation model that worked well for one attorney needed to be considered in the context of what might happen if the firm eventually applied a similar approach to several attorneys.
That meant we also needed to think about how compensation would fit into the firm’s broader cost structure as it grew.
A percentage that felt manageable for one associate could have a very different effect once the firm had several attorneys participating in similar plans, particularly if additional support staff and overhead were needed as the caseload increased.
Our client could then evaluate the compensation decision as part of the firm’s longer-term financial plan instead of treating it as a one-time negotiation with one employee.
This Is Where Knowing the Firm’s Numbers Matters
Because we handle the firm’s bookkeeping every month, we could see how compensation, marketing, staffing, and overhead were affecting profitability over time.
Our monthly meetings also gave the partners an opportunity to talk through what was happening inside the practice, including which attorneys were taking on more responsibility and where they saw the firm growing.
When the compensation question came up, our Fractional CFO work let us use that information to test different structures and show the partners how each could affect the firm’s financial performance.
The goal wasn’t to determine the smallest bonus the firm could get away with paying. The partners wanted to compensate the associate well and create a meaningful incentive for continued growth.
Our role was to help them design that compensation with a clear understanding of what the firm could support.
A Good Compensation Plan Should Work When the Employee Succeeds
The partners initially approached the conversation by asking what percentage of the associate’s fees would make a competitive bonus.
Once we worked through the numbers, they could consider that percentage in the context of what it actually cost the firm to generate and support the work.
They could also see what the compensation would look like if the associate had an exceptional year, if collections slowed or if the same structure was eventually offered to other attorneys.
That gave them a much better foundation for creating a package that rewarded the associate while still fitting comfortably within the economics of the firm.
When an employee performs exceptionally well, the business should be able to celebrate that success. A compensation structure that has been thought through financially makes it much easier for everyone to benefit from it.
