Understanding Law Firm Bonuses: A Simpler Bonus Structure for Associates, Paralegals and You

One of the hardest things to get right in a law firm is the balance between paying your team and paying yourself. This is especially true when determining bonuses for associates and paralegals. Unlike Biglaw firms, which pay out significant bonuses but have complex awarding processes, smaller firms can adopt a more nimble and strategic approach. Here’s a fair and simple law firm bonus structure that rewards everyone in your firm, improving morale, retention, productivity and profits.

A New Law Firm Compensation and Bonus Structure for 2025

In a couple of weeks, I’m headed to Oklahoma to present a new 2025 compensation structure to a law firm client. We’ve been talking about this for months — to be honest, the owner and I have been talking about this for years! The new structure includes the introduction of a new bonus scale for associates, paralegals and even staff.

Understanding Law Firm Compensation Models

Law firm compensation and bonus models are designed to reward attorneys and staff for their contributions to the firm’s success. While in some firms bonuses are discretionary, most are baked into law firms’ compensation packages.

These models can be complex and vary widely from one firm to another. Traditional models often focus on billable hours, client origination and revenue generation. This means that attorneys are typically rewarded based on the number of hours they bill and the clients they bring in. However, modern compensation and bonus models are shifting toward prioritizing teamwork, collaboration and better alignment with the firm’s values and goals. By doing so, these models aim to create a more cohesive, motivated and loyal workforce.

A well-designed compensation model not only promotes a positive work culture and improved productivity — it can keep people from leaving for higher pay at other firms or for steadier income and better work-life balance at an in-house job.

Challenges With Traditional Law Firm Compensation

Traditional law firm compensation models can lead to problems for firms, including:

• Overemphasis on Billable Hours. This can lead to burnout and decreased work-life balance for attorneys, who feel pressured to work long hours to meet billing targets.

• Competition Among Attorneys. Focusing heavily on individual performance can foster competition rather than collaboration.

• Lack of Recognition for Non-Billable Contributions. Activities like business development, mentoring and community service often go unrewarded, despite their value to the firm.

• Inequitable Distribution of Profits. This can lead to dissatisfaction among partners and associates if they feel the compensation model is unfair.

• Lack of Transparency and Communication. When employees don’t understand the compensation system, how the firm makes money or their role in the firm’s success, it can lead to confusion and disengagement.

The Evolution of Law Firm Bonuses

Over the years, bonuses have undergone an evolution. Law firm bonuses started out as discretionary. At the end of the year, everybody got a year-end bonus. Or at least you hoped so. In small law firms, annual bonuses were not a given.

For associate bonuses, the partners would sit around and discuss each attorney and decide how much they should get. The amount was based on some data — sometimes. The partners might consider how much the firm had made (or how much money was in the bank account), how much a particular associate had billed, and less empirical information like whether the associate had ticked off any partners that week.

They might take into account factors such as job performance, work ethic, teamwork and commitment. Eventually, the partners would settle on a (somewhat) random number for bonuses.

Bonus decisions were easier for paralegals and support staff. If the firm had had a good year, they usually received two weeks’ salary. If not, they might receive only one week.

As for the law firm partners, they took what was left over, rarely leaving anything in the firm to fund growth the next year.

Read: “Funding Growth: Are You Starving Your Law Firm?“

Enter the Production Bonus for Law Firm Associates Based on Billable Hours

While some firms continued to make bonus decisions in an ad hoc way (and still do), others realized they needed to base lawyer bonuses on something more than how a partner was feeling. They also acknowledged that paying out bonuses to associates more than once a year could have merit.

This is when the production bonus was born. A number of law firms told associates their billing goals and then paid out bonuses based on a percentage of every hour billed above that goal. Usually, the percentage was between 10% and 30%. Legal professionals have varied opinions regarding production bonuses, with some advocating for them based on personal experiences, while others highlight potential complexities and controversies.

Now that associates were in control of their bonuses, they quickly figured out how to game them. Not a lot of hours this month? That’s OK. Don’t bill more now; wait and bill them next month and get your monthly or quarterly bonus.

Then there is the problem of billed versus collected. Most firms in the U.S. collect somewhere between 75% and 85%. If firms don’t make it clear that they are paying on billed and collected, they end up paying bonuses on money that was never collected.

What about the paralegal bonuses under this compensation system? They still receive two weeks’ salary in a good year and one week in a bad year. Partners still get the leftovers.

Year-End Bonuses Get Even More Complicated

At this point, partners begin designing all kinds of creative ways to pay associates — using bonus structures so complicated CFOs could barely calculate them, much less anybody’s in-house bookkeepers. This complexity is often a result of a traditional law firm compensation model that prioritizes billable hours over quality work and collaboration.

As financial advisors to these law firms, at some point, our team said, “Enough!” We got to work designing a simplified bonus structure that works for small and midsize law firms.

A Much Simpler Structure for Calculating Law Firm Bonuses

The bonus structure we recommend is a version of profit sharing. It is based on building a team-based culture where everybody works together for the greater good of the entire firm. It is hard to “game,” and everybody, including the receptionist, can participate.

Here’s how this bonus structure works.

Organize Your Firm Into Teams or Pods

Studies have shown that when you consistently work with the same people, productivity goes up because you know exactly what they want and how they like it. We call these teams “pods.” While law firms traditionally organize around practice areas or client teams, pods might also be formed around an industry, or based on a specific goal, such as creating a new niche practice, increasing work with a specific group of clients, or exploring new products or services.

Determine the Pod’s Bonus

To determine the total amount of money available for bonuses, the firm adds up the pod’s revenues and then subtracts a marketing charge, the pod’s direct payroll and direct costs, and a percentage of revenue for shared overhead. The overhead percentage is usually the firm average. Some law firm owners put a little bit of cushion in the overhead percentage to account for inflation. (Read: “Understanding Law Firm Overhead: What It Is — and What It Isn’t.”)

What’s left after subtracting costs is the Pod Profit.

To arrive at the bonus pool, divide the Pod Profit in half: 50% goes to bonuses for pod members, and the remaining 50% goes to the law firm owner or owners.

Note that the marketing charge for contingency law firms is typically 33% because of referral fees. For everybody else, it is the average percentage you spend on marketing.

The pod can divide its 50% share of the Pod Profit in a number of ways:

• Based on salary.

• Based on what is billed and collected by the law firm.

• Based on how much the pod leader feels each person contributed.

The bonus decision is 100% up to the pod.

What About Origination Bonuses?

Origination bonuses exist here, too. Origination bonuses are paid out of the marketing charge. You pay somewhere between 10% for an hourly firm and 33% for most contingency firms.

The Benefits of a Pod-Based Law Firm Bonuses

Here is what I love about bonusing this way.

1. Because you are bonusing based on pooled money, everyone can participate — you aren’t sharing any particular legal fees with a non-attorney, which aligns with the ABA Model Rules of Professional Conduct.

2. It allows the pod to have some autonomy.

3. It shows the people in the pod how expensive it is to run a firm. They may begin to appreciate all you, as the owner, do for them.

4. It is a great training ground for attorneys. They are in a smaller environment where they can be mentored by one older, more experienced, person.

5. Pods allow firms to give an experienced attorney the perks of owning a firm (hiring and managing their team and workload) without any of the headaches of running a firm.

6. Firms that implement the pod system see retention go up.

As we head into the fourth quarter and plan for the new year, it is a great time to review your firm’s bonus structure and consider rolling out something new — something that includes everybody in the firm, something to get excited about, something that can pull the firm together.

Small Law Firms: Best Practices for Designing a Law Firm Bonus Structure

As I’ve written here before, the most successful compensation plans for small law firms use the rule of thirds: One-third of total revenue goes to payroll, one-third goes to other expenses and overhead, and one-third is profit. This means you need to have billable employees billing and collecting at least three times (3x) their cost of employment, though a multiple of five (5x) is best.

Following the rule of thirds helps ensure you share the rewards with employees without sacrificing your financial stability.

How your firm structures its compensation plans — including bonuses — greatly affects how invested your lawyer fee-earners are in achieving those multiples. Successful compensation plans — ones that help improve morale, productivity and profits — align rewards with the firm’s goals and values. Best practices for designing compensation plans include:

• Identifying key performance indicators. To measure firm success and individual success effectively, choose KPIs that align with the firm’s goals and values. (Read: “What Should Be on Your Law Firm’s Dashboard.”)
• Developing a performance-based compensation model. Reward employees for achieving these KPIs, ensuring that the model supports the firm’s overall objectives. (Read “Everyone in Your Law Firm Needs a Production Number.”)
• Factoring in ways to reward employees besides more money. Not everyone is motivated by more cash. Some, for example, may trade a lower salary for a lower billable requirement.
• Providing regular feedback and coaching: Make sure everyone in the firm — lawyers, paralegals, business professionals and support staff — understands their role in the firm’s success and how they can contribute effectively. If employees don’t have the knowledge or skills they need to reach those goals, give them access to training, provide mentorship or bring in an outside coach.
• Encouraging open communication and transparency. A law firm culture where people feel informed and valued improves motivation and engagement and can reduce turnover. (Read “How to Set Clear Expectations in Your Law Firm.”)

More Law Firm Financial Tips From Brooke Lively

For more tips on building a more profitable law firm, read:

• Why You Should Prep Your Law Firm to Sell — Even If You Don’t Want to Sell

• Are Your Law Firm’s Financial Systems Ready to Scale?

• Law Firm Profits: 5 Ways You May Be Sabotaging Your Firm’s Growth

• Law Firm Overhead: What It Is — and What It Isn’t

• Building a Law Firm That Pays You First

• Understanding Law Firm Profits — And What to Do With Them

• How Are Law Firm Owners Paid? Total Compensation vs. Salary