In November, Lisa Smith wondered if law firms will need to rethink their performance metrics as they change their business models. While her emphasis was on how the firm evaluates and compares itself to other firms, these metrics will likely need to cascade down to individual lawyers as well in the form of incentives.

Up until now, one of the major incentives for lawyers, especially younger lawyers, has been the number of billable hours they can rack up each year. Many people have pointed out this system motivates the wrong type of behavior. (Well, it is right for the firm in that more billable hours equates to more revenue but not so great for the clients, who have been the ones footing the bill for inefficiency.) The real question going forward is determining the type of behavior to motivate. I am reminded of a classic article on incentives written in 1975 by Ohio State professor Steve Kerr, who later went on to become the chief learning officer at GE and then Goldman Sachs, called "On the folly of rewarding A while hoping for B." In this piece, Kerr describes how incentives can often backfire. In a fascinating example, Kerr compares rewards systems from Vietnam and World War II. Soldiers in World War II were there for the duration and only got to return home when the war was over, while in Vietnam, solders went home when their tour was over. Kerr believes the differences in reward systems contributed to an environment where World War II soldiers were more obedient to authority (because their incentive was to win the war) while Vietnam soldiers were more likely to disobey authority (because their incentive was simply to get through their tour alive). Kerr believes the military installed a reward system in Vietnam that actually encouraged disobedience, since what was best for the army was not always best for the individual.

There are lots of examples of incentives gone wrong, especially lately. Remember those mortgage bankers who got paid based on the transaction volume instead of the long-term profitability of the loans? Yikes. Or the hotel that bonuses employees based on customer satisfaction only to find out their front desk clerks were removing unfavorable surveys? Incentives can be tricky - especially when performance goals are changing - because, as Kerr points out, even the best of intentions can lead to unexpected and unhelpful behavior. So when there is not much of a precedent, changing incentive structures can be challenging. One thing is for certain, however. Bonuses based on the number of billable hours will have some unpleasant consequences in a fixed fee environment. Author Jim Collins suggests asking this question: "What is the economic denominator that best drives our economic engine?" Is it number of hours? Profit per matter? Profit per lawyer? Profit per dollar spent on labor? Understanding these key drivers are the first step towards rethinking incentives in a changing business model.

-- Lisa Rohrer, Washington DC