The Bizzle

"Saving your ass since 1999"

When bonuses go bad:why my clients don’t want me to do a good job

In my post on legal heroism I mentioned in passing that my clients would prefer that I don’t do a good job. A reader asked me if the word “don’t” in that sentence was a typo – surely my clients want the very best from me?

Well, no. Or, at least, not always.

To non-lawyers, like my reader, that statement is counter-intuitive. Why would anyone want their lawyer to do a bad job? So I should probably explain…

Let’s start by asking what a good job looks like. The core of my job is drafting and negotiating contracts with customers and suppliers, so I might sum it up by saying that I’ve done a good job if I’ve achieved the best possible contractual position for my employer within the applicable constraints.

Those constraints might include one or more of the following:-

  • the deadline for the transaction
  • the respective bargaining power of the parties
  • the priority of the transaction compared to other work
  • corporate policies about what can and can’t be agreed
  • regulatory requirements

So you would accept that you needed to compromise on some points in order to conclude your contract before any deadline that had been set, or that you couldn’t achieve a particular outcome because the other side is in the stronger position. But if you’ve protected your position as far as you can in that context, you’re entitled to see that as a successful negotiation.

Now, you could have a long discussion about what “the best possible position” means (I’m of the view that contracts should satisfy both parties if possible), but I think that this serves as a definition of success for our purposes.

So what does my client want? (By the way, when I say “client” in this context, I mean the people who instruct me on a day to day basis – usually the sales team or the purchasing team. There’s a whole discussion to be had about this, but maybe another time).

Well, most salesmen get a bonus of some sort for bringing in sales. That means that what they want above all else is speed – lock the sale in with a contract, and then move on to the next one.

Mostly these bonus schemes are pretty basic, and pay out a cash amount based on the expected revenue or profit. There’s not often a claw back if the contracts turn out to be less profitable than expected – after all, that’s not the salesman’s fault, is it?

Which means that sales managers don’t care whether any particular outcome is achieved in a contract. All that matters is that it’s done quickly, so they can get their bonus, and I can get contracts done a lot quicker by just agreeing to everything that the customer wants.

It’s similar on the purchasing side: our buyers want to make savings, and the quicker they do it the easier they meet their annual target. That target is usually measured on budgeted expenditure, so it doesn’t matter if the supplier doesn’t deliver – and so again the actual terms of the contract don’t make any difference to the reward that the buyer receives.

This effect can be exacerbated by the incentives of the supplier’s sales force. Under the Sarbanes-Oxley Act, US businesses (which includes the parent companies of most of the tech suppliers that I deal with) must have binding commitments in place before they can recognise sales revenue. Sales bonuses are aligned to this, and the effect is that bigger discounts are on offer at the end of reporting periods so that the supplier can give a boost to their accounts – but only if the contracts are signed by that deadline.

So in general my clients do better if I complete contracts quickly. The easiest way for me to do that is to agree to the other side’s position on as many points as possible. You may not be surprised to learn that this is what my clients urge me to do.

And that’s what I mean when I say that my clients would prefer that I don’t do a good job: “Why waste time worrying about things that will never happen? You’re just holding everything up”. And so on, and so on.

To be fair, these incentives do make sense in basic financial terms. Most sales-focussed businesses use their order book as a key measure of health, or at the very least to set budgets, and you can’t really include something in the order book unless you’ve got a binding commitment from the customer. The sales manager’s incentive is aligned to that.

But it seems to me that schemes like this lock in conflict between the sales team and the legal team. They incentivise sales managers to demand unrealistic and conflicting deadlines, and lead them to ignore or downplay contractual risks.

So how do you fix that? The most obvious way would be to make bonus payments over the life of a contract, according to the actual profitability or saving that is achieved. That would at least encourage some focus on risks to those things.

Or, more radically, what if you flipped the incentives around? Maybe the sales manager could be rewarded according to how close the final contract is to a specified set of positions, and the legal team could be rewarded according to how quickly it was done?

Of course, we like things to be straightforward, and to be neatly tied in to financial years, and so on. So maybe these suggestions wouldn’t work, or maybe the sales managers would just go somewhere where they could get the big lump sum bonuses more easily.

But I’d be interested to hear about how this works in other sales-focussed organisations. Over to you lot…

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8 responses to “When bonuses go bad:why my clients don’t want me to do a good job

  1. anon May 6, 2011 at 5:21 am

    You need to redo this understanding that time is money.

    Srlsy bro, you could redo this mathematically and figure out how much YOU are costing your clients by insisting on a hedge for ridiculous events that will never occur, when what they are trying to do is push product and beat a competitor.

    Use black-scholes for rigor, or just use some expected value probability theory.

    There is an optimum, and it probably is not hedging everything. I suspect your clients have a far greater understanding of this real world scenario than do you, the eager beaver “Now I am Become Law, the Destroyer of People.”

    It’s not that they want you to do a bad, job, it’s just that you yourself and your legal trivia matter very little, and they got shit that needs to get done. We like you and all, but we wish you’d stop being so legal bizzle centric.

  2. Richard May 6, 2011 at 10:02 am

    There’s a pretty fundamental issue which you’ve touched on which is that the sales team might be right: if doing it quicker brings in more income than risks (when they manifest themselves) take out in costs later then steps towards ‘optimal’ contracts are wasteful. They cost more than they bring in. An interesting question is how the business determines what is optimal in contractual terms. Who measures the costs and benefits of contractual terms and how? Having participated in a discussion on LinkedIn with various in-housers on this, my impression is that it is almost always done on the basis of analytical argument: lawyers have a minimal evidence of what works and doesn’t work in cost-benefit terms. They make judgments of course, and advise their clients accordingly, often claiming on the basis of experience (where heuristics and biases can kick in in problematic ways). There is apparently a partner at (I think) Slaughters who claims to be able to quantify the ‘value’ of contracts and I’d be surprised if no canny in-housers were collecting metrics on this sort of thing. I believe there is some academic work in the States showing the value of this kind of analysis in Bond contracts – so it can be done. So I suppose my question for you is, before you change the incentives you need an evidence base for saying they are not working. What is it? Who’s responsibility is it to collect it? Is it worth it?

  3. Mrs B May 6, 2011 at 7:01 pm

    Having spent 8 years as a Quantity Surveyor in the hectic construction industry, I recognise the writer’s dilemma.

    When it came to contract negotiations you would be under pressure from the Estimators – they wanted their sale (usually promising the Client things the legal team couldn’t accept) and the contracts team – eager to get on site and get the job done.

    Regardless of how open we were with either side, it was always deemed that we were ‘causing trouble for the sake of it’.

    Marketig and Sales directors conflicted with commercial directors on acceptable risks but they were no where to be seen when we need to rely on the contract. The doubters never are!

    Being in-house provides for an understanding of the Market and the business that out sourcing cannot achieve, however the conflict and lack of understanding by others can make the situation untenable.

    Yes some of us legally trained bods can be anal but so can some designers, cleaners, doctors, firemen etc – give us a break for doing our job. At the end of the day we don’t want the business to go belly up, just like you don’t!

  4. rachaelvaughn May 6, 2011 at 7:18 pm

    As a fellow in-house lawyer, I am so glad you made this post.

    There is definitely a tension with any transaction when a lawyer gets involved and starts “holding it up” by pointing out the risks. This is why I think it is a crucial skill for in-house lawyers to know their businesses well so we can point out the big risks and concede on the smaller points. There is also an art to developing an internal reputation as a lawyer who can educate clients about risks without being the policeman.

    This dynamic also pops up in the context of outbound IP licensing where the royalty is reported as a “win,” but the liabilities and risks are not evaluated in any substantive manner. It is only later when litigation comes up that these ugly things resurface.

    I like your idea for rewarding business folks based on how close the final agreement is to a specified set of positions. Although this would require a lot of documentation, I think it could help teach negotiation skills and better communicate strategy.

  5. JFBrashear May 6, 2011 at 11:00 pm

    I’ve been an in-house lawyer for 15 years and spent almost the same time in law firms, so I’ve seen many times the dynamic that you note. The short answer is that this should not occur in a well-functioning organization. The crux of the problem lies in defining who is the decision maker for the client.

    Often, the folks who most want to get a deal done are not the ones who ultimately bear the risk. The sales team is incentivized to book the sale, close the M&A deal or whatever. They might have a commission claw-back that’s tied to certain shorter-term risks (like nonpayment). They do not, however, bear the longer-term legal risks. Those are borne by the business owners (with whom, one hopes, senior management is aligned through equity compensation). In that respect, the sales team’s interests actually may be in conflict with those of the organization.

    If a deal later suffers from a problem – whether or not it is a “legal” problem” – the sales team may back away from responsibility. The sales people are not necessarily looking for the correct legal judgment. They are looking for someone to promptly make a judgment in order to get the deal done. Sometimes, they question the legal judgment because it impedes getting the deal done. You’ll find them later, after the deal implodes, pointing at the in-house lawyer while proclaiming “But Legal approved it!”

    The sales team almost never attempts to analyze the costs/benefits/risks of legal issues – assuming that sort of analysis were even reasonably possible. They don’t appreciate that slight factual differences can significantly change the legal risks. The risks vary by jurisdiction. The law is constantly evolving. That is why one cannot rely on checklists and quantitative analyses of legal issues. It is not a job that can be outsourced to computers.

    Businesses hire and pay lawyers to exercise legal judgment based on their understanding of the law and the business they are representing. A good in-house lawyer is foremost a business executive whose job is to facilitate the goals of the organization, while advising the decision-maker how to appropriately manage legal risks.

    The lawyer’s job is not to minimize legal risks, not to make business decisions, not to set negotiating tactics and not to get the best possible position on contract terms. The lawyer’s job is to provide counsel to the organization’s decision makers.

    A good lawyer proposes an initial draft contract that is clear and fair. A good lawyer does not unnecessarily complicate and delay negotiations by proposing disorganized, verbose or over-reaching contract terms. A good lawyer spots a legal issue, but also offers the decision makers one or more solutions that keep the deal on track and bring the risk within an acceptable range.

    The sales person is not necessarily the appropriate decision-maker for the client. An in-house lawyer sometimes needs to escalate issues within management. For example, where the sales person is making poor judgments or is violating the law. The lawyer does not represent the “deal” or the sales team. The lawyer represents the organization.

    It does not help in this dynamic that the sales team is compensated under schemes that are totally different those that apply to executive management. Sales people generally are compensated for booking revenue, although they might be compensated based on the gross profit from the deal. Their compensation is largely cash and is tied to short-term performance in a narrow business segment – with quarterly targets. The lawyer, as other executive management, more likely participates in a performance-based compensation plan that is longer term, looks at overall business performance, and includes equity.

    The answer is not to compensate the lawyers like the business compensates the deal team – because then those lawyers may be overly-incentivized to just get the deals closed. It also does not make sense to under-compensate the sales team for meeting short term sales goals – because then they might take their eye off the revenue targets that drive business growth.

    The correct (and difficult) answer is for the organization to hire sales and professional staff (legal, accounting, IT, etc.) who are knowledgable, smart, hard-working, collaborative, aligned with organizational priorities and demonstrate good judgment in balancing business objectives with risk management. If the sales team pushes the professional staff to take shortcuts or make bad decisions, or abuses the professional staff, then the organization has the wrong sales team – no matter how much revenue they are producing. If the professional staff is not adequately supporting the sales team, by being too slow, or overly risk adverse, or showing poor skills or judgment, then the organization has the wrong professional staff. In a perfect utopia, the company’s culture and its CEO help these groups maintain a symbiotic equilibrium that benefits the whole organization and its owners over the longer term.

    Reality makes life a bit bumpier.

  6. Ashley Connick May 12, 2011 at 10:00 am

    Great piece, Mr B. I recently did a little bit of work experience in-house, and was told a few stories about occasions like this where legal is at odds with sales teams, either in their own company or on the other side, which cause deals to be held up. It’s something that I was also told can be forgotten in private practice, and is a piece of knowledge I intend to retain. Ensuring you think about all other parties’ motivations and remuneration is important in finding a solution when you reach an impasse, as well as understanding their behaviour in certain situations. Being a lawyer is about people as much as it is about law – I think, from what I’ve seen, that sometimes that can be forgotten.

  7. Pingback: A game of risk « The Bizzle

  8. Gaston Bilder June 3, 2011 at 1:44 pm

    Great post. Reading the article and the comments, a few things seem to stand out:

    – Time = € = risk ?. Legal fees vs. hypothetical risks (which are also hard/impossible to quantify)?.

    – No optimum equation between drafting/negotiating vs. risks avoided. Goal is not to draft the “perfect” contract, may be the optimal one (Paretto efficient). More important is: how the business determines what is optimal in contractual terms? who does this analysis?.

    – Incentives do work. But don’t let the wrong/short term incentives trump the long-term view/alignment. The solution is not to realocate bonuses, but – as mentioned – to 1) have the right corporate culture and people 2) balance short term with long term goals in order to do business somewhere close to the equilibrium point between a) minimum risk/no deal and b) its not my problem (and by the way legal approved it). 3) Execution/decision makers should always be in the loop.

    – Lawyers have a hard time to argue their case for better drafting on the basis of a cost/benefit analysis (other than anecdotically), i.e. it is hard to predict what could happen: lawyers” have a minimal evidence of what works and doesn’t work in cost-benefit terms”.

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