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Does Your Bonus Structure Comply With Ethics Rules?

By William Peacock, Esq. on June 10, 2014 | Last updated on March 21, 2019

An ethics opinion out of Texas has drawn a lot of scrutiny over its ban on managerial titles for nonlawyers (e.g., Chief Technical Officer) in firms -- indeed, we had a lot of fun coming up with alternative titles for CTOs -- but the opinion also pointed out another area where firms can get into trouble with nonlawyer ownership and management prohibitions: bonus structures.

Contingent bonuses are target of the opinion, and if your firm bases bonus on revenue, you might want to reconsider.

Money's Mighty Tempting

Though the sloppily drafted opinion jumps back-and-forth between job titles and bonus structures, two issues that probably could've used their own separate discussions, a few of the cited rules seemed to apply to bonus structures specifically.

Rule 5.04(a), for example, generally prohibits lawyers and law firms from sharing fees with nonlawyers. The opinion cites Comment (1) to the rule, which discusses the purpose of the prohibition: disincentivizing nonlawyers from soliciting clients or practicing law in the pursuit of more revenue.

Rule 5.04(d)(3) addresses nonlawyers influencing the professional judgment of attorneys, something that might happen if, say, a Chief Financial Officer (a title which is verboten under this same opinion) were to push the lawyer to squeeze more money out of her clients at the expense of proper lawyering. Or equally dangerous, cutting resources to increase profits, with the unfortunate side effect of impaired delivery of services to clients.

A Proper Bonus Structure

According to the opinion, a plan "tied to achieving a specified level of revenue or profit" is prohibited. More specifically, firms should steer clear of a "specified bonus that is tied to specified revenues or profits, such as: 'We will pay you a bonus of $10,000 if the firm's revenue (or profit) for the year is at or above $1 million.'"

But, you need not be ignorant of revenue altogether:

"Of course, a law firm's willingness and ability to pay bonuses will depend upon the firm's profitability. As a practical matter, a law firm may consider its revenue, expenses, and profit in determining whether to pay bonuses and, if so, how much."

In short: money matters, but don't promise payouts based on revenue targets -- it'll apparently tempt the nonlawyers to impair your lawyerness. (And lawyers, absent the peer pressure, are never tempted to inflate bills.)

Editor's Note, June 14, 2016: This post was first published in June, 2014. It has since been updated.

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