Potential Pitfalls for Law Firm Bonus and Incentive Programs

By Jason O’Dell, MS, CWM, and Adam Braunscheidel, CFP®

What motivates your best employees? Do you believe your staff is driven by the same factors that drive you? Employees may not be as invested in the success of the law practice as you are, which may create a chasm between you and your staff. Some law practices seek to bridge this gap by giving employees an opportunity to share in the successes of the practice. With this strategy, your employees can enjoy increased compensation and stability, and you can reap the benefits of increased employee engagement, loyalty, and productivity.

The two most common structures that practice owners use for bonus programs are performance-based models and profit-sharing retirement plans. Before proceeding, it is imperative that you as the practice owner seek the advice of a trusted advisor who fully understands your practice and your motivations for starting a plan. Why you are starting (or amending) an incentive plan will be very important to determining what type of plan you implement.

Performance-based Models

Performance-based models generally take the form of a cash bonus or company stock options. Bonuses are typically paid out when an employee obtains a certain level of performance defined by the employer’s plan. A bonus can come either individually or through a companywide collaborative channel. In most instances, the employer is permitted to deduct the bonus payment as a practice expense, while the employee pays normal income taxes on the bonus received. Many employees prefer bonuses, because they have the flexibility to spend or save those dollars. A bonus plan can motivate employees, but it generally will not increase their engagement or foster loyalty.

Stock options may increase loyalty and engagement by creating a situation where the staff has some “skin in the game” as it relates to your law practice. Option plans are generally used by early-stage companies that may not have the extra capital to pay out liquid bonuses to employees. These programs usually allow employees to buy shares of company stock, typically at a discounted or set price during a specific period of time. The benefit is not realized until the employee exercises the option.

Options can be simple or complex. They may provide limited voting rights or no rights at all. Employers can also attempt to control redemption rights. Deciding between a bonus program or an option plan will generally come down to what you are trying to achieve with the plan and how you intend to fund it.

Profit-sharing Plan

Profit-sharing plans make sense if your law practice has a stable income. Your motivation to use a profit-sharing plan should stretch beyond potential monetary gains. Many practice owners we consult with have a 401(k) plan in place with some method for matching contributions, which typically come in the form of a Safe Harbor Match by contributing a percentage based on each participant’s compensation or deferral elections.

The matching benefit for employees can be taken further with the introduction of a discretionary profit-sharing plan. These plans come in multiple structures. They allow owners to choose how much to contribute annually and whether the funds will come from profits or another source. Owners also have the flexibility to determine when or if a contribution will be made in a given year.

Profit-sharing plans can function as a reward system that draws a direct correlation between your employees’ actual work and the reward received. The plan may also foster a culture of ownership within your workforce if employees are rewarded based on their contributions to the practice’s success. If employees see themselves as owners, they may have more incentive to work to increase the practice’s profitability.

Pitfalls

Any plan or structure carries potential pitfalls. Your employees may not be ready or able to gauge the impact of their individual work on the overall profitability of the practice. In some situations, employees may come to consider the benefits to be entitlements or part of the general compensation rather than something they must actually earn. Employees at different levels of your practice may have different understandings of what may and may not affect the profitability of the practice—and how that corresponds to the implemented plans.

Communication at the time of a plan’s implementation and throughout its duration is paramount to keeping owners and staff on the same page. Retaining good employees is difficult; having some sort of incentive program, either performance based or profit sharing, can help by cutting down on turnover and increasing the overall stability of the office.

These programs are neither quick nor easy fixes for an undercompensated workforce. Prior to implementation, consider the following:

  • What are you trying to achieve with the implementation of your program?
  • How will you fund your program?
  • Who will be eligible for your program?

Once you answer these basic questions, you can begin the process of developing a plan that fits your law practice.

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Jason M. O’Dell, MS, CWM is a financial consultant and an author of more than a dozen books, including Wealth Management Made Simple. He is a principal of the wealth management firm OJM Group www.ojmgroup.com, where Adam Braunscheidel, CFP® is a wealth advisor. They can be reached at 877-656-4362 or odell@ojmgroup.com.