General Counsel Bonus Structure

This Wisdom of the Crowd, compiled from questions and responses posted on various ACC Committee eGroups*, addresses the issues of establishing a bonus program for General Counsel. The issues discussed include:

I. General Counsel Hourly Compensation Arrangement
II. General Counsel Bonus Structure
III. General Counsel Bonus Program Metrics
IV. Additional ACC Resources to Consider

*(Permission was received from the ACC members quoted below prior to publishing their eGroup comments in this Wisdom of the Crowd resource.)

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I. General Counsel Hourly Compensation Arrangement

Question:

Recently, my company asked me to accept an hourly compensation in place of a fixed weekly salary to reduce costs. The company is a financial services start up in business for less than three years. The main office is located on the East Coast. The company does business countrywide and has employees in every major region. The total employee count is just under 30. I am the only attorney. To date, the company has only used outside counsel for intellectual property matters.

Any suggestions from other ACC members about billing arrangements that they have used successively would be appreciated. For example, should billing be on a project or an hourly basis or some combination of the two? How should the hourly rate be established, e.g. by using law firm rates for similar services, by using the former biweekly salary as a basis or by using another method? ¹

Wisdom of the Crowd

Response #1

Can I ask: is there enough "legal work" going on in the company to keep you fully busy/engaged 40 hr/wk? It would seem that the company is implicitly saying they don't think you are busy enough to justify what you are being paid, which seems to be a difficult message to sugar-coat. Therefore, are there other aspects of the business itself that you can 'pitch' to take on within your contribution to the company, e.g. media relations, h.r., oversight of your company's distributors and their performance, etc? Especially in small companies, everyone tends to wear many hats.

I am presently serving as "virtual" in-house counsel for two small companies who, on their own, cannot separately justify having a full-time paid-on-staff lawyer. I have structured a flat-fee monthly retainer that represents a considerable hourly value/discount over what is otherwise the 'going rate' for general commercial / labor-employment types of project-based legal services from the firms around town. I come on-site one or two days each week (depending on the client), and am available 24/7 as if I was traveling or working at one of their company satellite offices. The companies do not compete with each other, nor are they in 'conflict' by way of vendor/customer issues.

On a related point: is this request perhaps an effort to pin-point which site/location is "monopolizing" your time the most? Many companies internally track hours/costs of the legal department, to be 'charged back' based upon a utilization rate. Perhaps, then, this would be a good opportunity to discuss how the legal department (meaning, you) are paid for internally, and if you are merely a GS&A overhead absorbed in the general budget, or if your services (and the outside counsel, as needed) are charged based upon departments. Often, for example, one particular group will disproportionately seek patent/trademark filings because they are not charged with the costs of these filings directly but the costs are born at the macro/corporate level. ²

Response #2

It is difficult to respond to this question -- or to know how to begin responding -- because the intent of this switch is not really clear. Does the company intend for you to continue as an employee of the company, but simply change the manner in which your compensation is calculated? Or does the proposed switch to hourly compensation mean that you would be changing from "employee" status to an off-payroll, independent contractor status?

In the former case, I'm not quite sure how the proposal would save the company any money unless the company expects you to work -- on average -- less than 40 hours/week. What happens if something big develops and it becomes necessary for you to work 50 - 60 hour weeks for a period of time? As an exempt, salaried employee, the company has no obligation to pay you any more than the regular salary. If the company is determining your pay on an hourly basis for actual hours worked, then its costs during such periods would actually go up instead of down.

Although the question doesn't say it, it sounds like the switch to hourly pay is premised on your going "off payroll" and acting as an outside, independent contractor. This eliminates the company's obligations for employment taxes, workers' comp, insurance coverage and other employee benefits. It's only cost becomes the direct hourly compensation. The implications for you would be significant: paying self-employment tax on the income; arranging your own benefits/insurance coverage; malpractice insurance; and it would probably be advisable to incorporate and provide the services through a professional corporation. All the costs of which -- not just the hourly equivalent of the current biweekly salary -- should be considered when setting the hourly rate to be charged for the services.

And if you are, in essence, becoming a solo practitioner whose law practice is based principally on supporting this single client, then you should also look at market rates charged by small law firms and solo practitioners of similar experience. But the question of how to set an appropriate rate seems secondary to the more fundamental question about your intended status -- as an employee or an independent contractor -- as a result of this proposed change. ³

II. General Counsel Bonus Structure

Question:

Being new to in-house and developing the law department for the first time within my company, I was wondering if anyone had a good bonus structure in place for General Counsel or what metrics they use in order to determine a bonus. ⁴

Wisdom of the Crowd

Response #1

I don't think there is a standard "GC" bonus structure. It really depends on the industry, the company and the role. In my position I prefer for my bonus structure to be very similar to the other executives. This means that a large portion is based on the success of the company as a whole, which is a result of the strategy I help to define. If I wasn't involved in the strategy as much and was more of a "nuts and bolts" attorney, I'd probably want it tied to reduced budget, better operating costs, shorter turn around times or increased output. ⁵

Response #2

A few thoughts from my years at ACC, and from what I've seen in practice in the last year:

There are a wide range of GC bonus structures out there; my personal take is that it's important to set up incentives for bonus that are not tied to company performance in the same manner that many other corporate leaders are incented - I usually advise GCs to consider whether they are comfortable with the risk that there could be a suggestion that the GC might have looked the other way or done something that promoted revenue production over safety/compliance/prudence should someone be looking at a failure with 20/20 hindsight and pull the GC's actions into the scope of scrutiny.

The systems that I have seen that I thought were well-constituted set measurable goals or perceptional goals for the GC or department staff, and offered eligibility for a bonus pool or percent if those goals were met. By measurable goals, you could include such metrics as improved safety records, a target number of compliance trainings or improved employee awareness or testing on compliance-related assessments, completion of certain tasks (a new employee handbook by August, patent applications and trademarks successfully filed or defended in the FY, etc.). You could also include management metrics (the dept. met budget or came in under-budget, you successfully implemented new outside counsel retention guidelines and realized savings of X, you installed and developed new technologies to automate legal functions and saved worker time/improved measurable performance, etc.). You may also want to include professional improvement, such as new lawyering skills added/mastered (project management skills or new internal expertise added to insource FCPA or OSHA or whatever compliance), robust participation in company-designated corporate social responsibility programs, quantifiable community service performed, increased amounts of pro bono work by lawyers, or an improved diversity outsourcing record. There is no end to the list of great performance-related goals you can create. And the pools of bonus money that are set can be as lucrative as those offered to other executive level leaders in the company - they will simply be determined based on metrics more amenable to lawyering than direct revenue targets, for instance.

In terms of perceptional goals, I know of some departments that regularly survey internal clients to assure that lawyers are performing to client expectations/satisfaction: you may wish to set your internal bonus goals to include either continuing high scores or improved evaluations by clients. Scorecarding is "riskier," I know, but if you're truly looking at what performance counts the most toward bonus, it could be argued that nothing should be more important than whether your clients think you're doing the right job and doing it well. Since you get to set the questions, you can choose the specifics you think would be most fair to evaluate, and you can evaluate regularly so that if you see a less than stellar result in March, presumably you can address the concerns and pull your scores up by December.

There is nothing unethical about incenting and bonusing lawyer performance. I simply think it's safer not to tie it to business performance in terms of revenue and profit, especially if you wish to avoid any accusation that your decisions or methods were "informed" by what would enhance (or devalue) your bottom line. It is worth noting that many GCs (but not their whole law dept. staff), especially in very large companies, are often part of exec comp pools that pay out bonus-type comp based on company performance related to predefined plans; all members of the C-suite get these payments along with other elite executive staff - they can include pay-outs for everything from options to hitting targets. For these GCs, this is the bulk, not a sidebar "bonus," of their yearly take home pay. It is not uncommon for salaries for top Fortune GCs to be several hundred thousand, but to that is added other perks (or their value) and performance-related bonuses of millions per year. I know it's common; I know it's not unethical; I know it's extremely lucrative. I'd weigh it carefully, however, if that's the fortunate "problem" you have, since it may suggest that the primary role of the GC is more one of C-suite executive than that of lawyer for the entity. For some GCs, that's a truth about their role that they are totally comfortable with and that they encourage - they do see themselves in more of an executive role (risk assessment) than a straight legal role (delivering legal services, per se); they are not daily engaged in the practice of law so much as co-directing the business course of the company. Others many not want their professional status muddied by setting up their comp treatment to be exactly the same as that accorded to other execs, especially in the event of a failure, at which time they do not wish to be perceived as the client instead of as the client's lawyer (either for liability purposes, or in case they wish to perform the role of counsel to the company through the failure without being conflicted out). ⁶

Response #3

I asked the leadership of our Compensation Survey partner company, Empsight, to address this question. Here's their response:

"This is a question we were interested in and asked about in prior editions. We stopped asking because the answer was invariable the same. The GC and the Law Department are invariably part of the broader corporate wide Management Incentive Plans (MIPs), with no special metrics focused on the department itself. While the logic was never articulated, I offer the following rationale:

The Law Department is a staff function in support of business operations and should therefore be tied to the broader metrics that the business leadership are measured on, such as: Revenue Growth, Net Income, EBITDA, Earnings per Share, Total Shareholder Return, or whatever measures of business success are used.

You do not want the Law Department to have its own set of metrics divorced from the rest of the business as you could get unintended outcomes. For example, you might have the law department having a stellar year because of some settlement from a 5 year old case, when the rest of the business in having a terrible year, with revenues and operating profits way down.

Most complex MIPs have a weighting scale with some small portion being set aside for Personal Objectives. In the case of the GC, you could have measures related to the effectiveness of managing outside counsel costs, the ratio of inside to outside spending, the cost of the legal function as a percent of revenue (relative to industry peers), or some such measures. However such Personal Objectives should be linked to the overall Business Performance components of the plan, in a multiplicative rather than additive way. In other words, even the Personal Objective piece should be impacted by the main business performance measures.

Just a note on terminology - what I have described above would be part of an Incentive Plan. Incentives are plans communicated at the start of the measurement period, where the performance measures are defined and communicated and where the payouts are clear based on the attainment of measured performance criteria. The writer referred to a Bonus arrangement. Bonus plans are, typically, discretionary, after-the-fact payments. They therefore lack the structure and clarity of an incentive plan and are therefore less likely to shape behaviors during the year. They are useful in situations where the metrics and goal setting are immature due to the relative novelty of the activity. My bias is clearly towards the Incentive approach."

We hope this sheds even more light on the subject. And, just so you're aware, the compensation surveys are available at http://www.accempsight.com/ with this year's (2012) reports coming out in the next few weeks. ⁷

III. General Counsel Bonus Program Metrics

Question:

I'm General Counsel of a company that has just put in place a bonus program in which 65% of the bonus will be guaranteed and the other 35% will be based on my performance. I am required to come up with a set of 3 to 5 metrics/goals (they're calling them "management business objectives") that I need to try and meet in order to be entitled to the portion of the bonus that is performance-based. I'm having a hard time coming up with these metrics. Can anyone give me some ideas? ⁸

Wisdom of the Crowd

Response #1

Not sure if these are of help to our colleague (depending on company size, structure, etc.), but here are some things I am measured on each year at my annual review - our company also strives for objective metrics:

How many people I have trained in some area of risk avoidance (I have a goal and an "exceeds" goal).

Whether or not I regularly provide reports to senior leaders within the company regarding new items of impact (this could be regulations, new legislation, recent court cases, etc.). I am expected to communicate these items at least monthly.

My response time to various things: for instance am I returning all calls within 24 hours (at least to just say "I got your call and am working on it"), am I providing base level opinions within X# of days, etc.

Can I demonstrate that I have regularly worked with, and included, other areas of legal/compliance within the company when they would have a need to know, or may even need to be the main touch point on an issue?

Have I voluntarily taken on some new role, be that a pro bono effort, a work/project committee, a philanthropic effort for the community on behalf of my company, etc. ⁹

Response #2

When I've had to come up with metrics in the past I always use scores on trainings. I often conduct trainings for staff on various compliance issues. I then use Surveymonkey or even a paper survey to get feedback from the audience. For example, I set a goal of obtaining an average score of 8 out of 10 on training survey results. It's easy to implement and verify. ¹⁰

Response #3

My company has a very formal performance based management system. 80% of my bonus is based on achieving my goals. We have individual goals and team (can include non-lawyers) goals. Set some project goals like creating a records management program or enhancing the X process or developing the Y process. Make sure they align to overall business objectives. ¹¹

Response #4

On the claims and litigation side, we use things like, % of matters handled in house without outside counsel (lower costs); number of matters we new about for litigation before a formal claim is filed (better able to manage costs and seek early settlement without discovery fees if appropriate); number of matters handled per staff; comparison of inside costs vs. what is would cost to take outside.

On the corporate legal side, we track a number of things including numbers of contracts and dollar value handled; savings we created by our in house negotiations in a deal; comparison of inside vs. outside costs. In general, we track anything that we can use to demonstrate value to the business colleagues. I will say that it took us a few years to do a baseline so that we could track. ¹²

Response #5

We are looking at the same issue. We're considering using scores generated by an internal client satisfaction survey that addresses timeliness and quality of responses to requests for legal assistance. We're also considering incorporating our ability to stay within budget, but I think we'll have to come up with a way to waive unexpected, extraordinary expenses. Not sure we'll get there. ¹³

Response #6

Some objective legal goals we've used include presentations/updates/trainings to internal clients, as well as posting legal tidbits on our company intranet webpage and other corporate communications vehicles. Typically each attorney has a large project on the horizon that can be worked into a goal based on different milestones and levels of completion. For example, an internal I-9 compliance audit whose milestones would include training, audit, process improvements, and follow-up.

Hope that helps. Admittedly, we struggle with developing goals in our legal department. It's not easy, but it helps that we have a fluid system that allows us to modify goals throughout the performance year based on extraordinary circumstances. ¹⁴

Response #7

I agree with some of the other comments on stating goals or objectives to be accomplished. But it is also very important to identify one or two data-based metrics that you can use as a basis for measuring performance and discussing the outcomes with your management. Since the performance of virtually every other business unit or staff support group is based on such metrics, management will generally support and appreciate your efforts to think and speak in the same language (numbers) about the legal operations.

One measure I have always used is "total legal expense as % of gross revenues". There are surveys that collect and publish averages of this ratio according to company size, industry, etc., so you can benchmark your performance on this metric against peer companies. If the average for companies of similar size is 0.48, but your company's legal expense/revenues ratio is 0.37, this can tell a good story about your skillful management of legal affairs. You can also track this ratio from year-to-year as a way of demonstrating improvements in performance; be prepared to analyze your legal spending (internal and external) and explain what specific things you have done to maintain or decrease the ratio.

I once worked for a consumer products company, and the nature of the products gave rise to a fairly predictable number of minor injuries and property damage claims. Before I arrived, the company relied on a claims handling service (affiliated with the liability insurance carrier) to deal with the claims, which charged a flat fee of $xxx per claim, in addition to the settlement costs. A little analysis revealed that the per claim handling fee was higher than the average settlement, so we in-sourced the handling of claims. I used the "costs per claim" metrics to show that both settlement cost per claim and handling costs per claim went down.

If you develop a couple of good metrics that apply for your company's business and your legal functions, you can make a powerful case for earning that 35% of bonus that is performance based. ¹⁵

IV. Additional ACC Resources to Consider

"2011 CLO Survey," ACC Survey (Oct. 2011)

"2011 Small Law Department Compensation Survey," ACC Survey (Nov. 2011)

"In-House Global Salary & Benefits Survey," ACC Presentation (Jul. 2010)

"Strategic Planning: Why a Plan is Needed and How to Develop One," ACC InfoPAK (Sept. 2009)

"Organizational Effectiveness: The New Imperative for Developing a World-Class Legal Department," ACC InfoPAK (Jul. 2011)

¹ Anonymous (May 07, 2012).
² Laura Vogel, Assistant General Counsel, the Auto Club Group (May 08, 2012).
³ Rich Veys, Chair of Small Law Department (May 08, 2012).
⁴ Anonymous (Aug. 21, 2012).
⁵ Tanya Avila, Associate General Counsel, Volusion, Inc. (Aug. 22, 2012).
⁶ Susan Hackett, CEO/CLO, Legal Executive Leadership, LLC (Sept. 18, 2012).
⁷ Jim Way, Director of Membership Marketing, Association of Corporate Counsel (Sept. 18, 2012).
⁸ Anonymous (June 21, 2012)
⁹ Kristi Holzer, Assistant General Counsel, Allied Insurance (Jun. 22, 2012).
¹⁰ Anonymous (Jun. 22, 2012).
¹¹ Bruce Martino, Associate Legal Counsel, GoJo Industries, Inc. (Jun. 22, 2012).
¹² Janet Miller, Chief Legal Officer, University Hospital Health System (Jun. 22, 2012).
¹³ Tony Hullender, Senior Vice President & General Counsel, Blue Cross Blue Shield of Tennessee (Jun. 22, 2012).
¹⁴ Anonymous (Jun. 25, 2012).
¹⁵ Richard Veys, General Counsel, Society of Actuaries (Jun. 26, 2012).

Published on March 22, 2013