Law People : Law Practice Management, Organizational and Personal Dynamics; Talent Management : Ronda Muir of Law People Management, Inc.

Last week The Wall Street Journal reported that Cravath, Swaine & Moore, the industry pacemaker in this matter, announced that it will keep associate year-end bonuses for 2011 the same as last year--$7,500 for a first year associate up to $37,500 for  the most senior associates.  Not only are these bonuses far below 2007, when first years received a total of $45,000 and seventh-years a total of $110,000 (in each case including a second year-end bonus), but the fact that that they are not being raised at all this year from low bonuses last year also indicates the continuing weakness of the legal industry, according to the article.

[It might be pointed out that early this year Sullivan & Cromwell offered associates a second bonus for 2010 ranging from $2,500 (first-years) to $20,000 (seventh-years). Cravath and others followed suit and even raised S&C, which could possibly happen again.]

Commentators have busily sunk into a slug-out over whether these bonus rates are fair to associates when at least some firms, including Cravath, are reporting increased partner profits. According to The American Lawyer, in 2010 the overall average equity partner profits for the Am Law 100 of almost $1.4 million returned to pre-recession levels, while Cravath’s PPP has risen from $2.5 million in 2008 (sharply lower than in 2007) to $2.7 million in 2009 and $3.17 million in 2010.  It's enough to prompt at least one commentator to militate for an Occupy Big Law movement.

There is a lot that is distinctive about law firm bonuses--they are totally transparent within firms and outside, matched to the dollar by competing firms, and presume that law students and young lawyers are not able to compare firms on any basis other than raw compensation. In most cases, they are dished out in automatic response to whatever the last competitor has done.  In an era of severe client cost pressure and increasing competition from alternative legal providers, such a reflexive approach to compensation seems, well, unbusinesslike.

And there is also good reason to believe that it's a waste of money--according to an analysis by the American Lawyer of their survey of midlevel associates.

"An examination of the results of our 2011 Midlevel Associates Survey shows that there is no statistically significant relationship between associates' ranking of their compensation and benefits and their expectation that they will still be at their firm in two years... Our finding echoed a 2007 study that Indiana University Law professor William Henderson did based on our 2004 Midlevel Associates Survey—he also found that the relationship between compensation ratings and the expectation that associates would stay two more years at their firm was close to zero."

The correlation between the second bonuses given in the spring of 2010 and how associates rated their compensation was also tenuous, with the associates at S&C--the firm that started that round of bonuses--giving lower marks to their firm for satisfaction with their compensation than two firms that didn’t award spring bonuses.

So maybe we shouldn't be so presumptuous after all?  The highest paying, largest law firms still lose 18%+ of their associates every year, according to NALP.

The challenge is to understand the positives and negatives of differing approaches to compensation--lock-step, merit, semi-merit--in this market environment.  How do these approaches affect recruitment, attrition, productivity, teamwork and work environment?  It may be easier to just blanket repeat what Cravath has done, but there are much greater rewards for taking a more thoughtful and current tack.

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The American Lawyer has just issued its Report on Laterals 2012, in which it found that in the 12 months ending September 30, 2011, 2,454 partners left or joined Am Law 200 firms, for a 22% increase over 2010, when there was the lowest number of moves since 2000. "This year's figure was consistent with the annual average of 2,458 partner moves from 2005 to 2009 and was higher than the number of lateral moves in 2007, when 2,423 partners moved. Even without the 208 partners that the March dissolution of Howrey added to the 2011 total, there was still a 16% increase in partner moves over the previous 12-month period."

Big losers of 30+ partners include K&L Gates, McDermott Will, Hunton Williams, DLA Piper, Latham & Watkins, and SNR Benton.  The gainers of 30+ partners are in some cases the same: DLA Piper, Jones Day, K&L Gates, Greenberg Traurig, SNR Denton, Baker & McKenzie, Winston & Strawn, Perkins Coie, Dewey & LeBoeuf, Kirkland Ellis, Polsinelli Shughart and Reed Smith.

But, as the report points out, "this year's uptick in lateral churn does not mean the boom years are back." Both transactions and litigation are down, so the increase in lateral movement seems more an indication of failing firms being dismantled by growing ones. With the gap between the haves or hope-to-haves and the don't-really-haves growing even bigger.

The troublesome part continues to be the lack of success in making these lateral hires productive members of the team. A UK survey reported earlier this year by The Lawyer found a staggering percentage of laterals simply failed to take. In a study of nearly 2,000 lateral hires over a five-year period, 33% left their new firm within three years and 44% left within five years. While no definitive data exists regarding US laterals, various reports provide some clues: in Altman Weil's 2011 Flash Survey Law Firms in Transition 92% of firms surveyed intend to grow through lateral hires, there was a median 90% retention rate of laterals over 5 years, and @ 70% success in laterals meeting financial goals.  Our anecdotal reports of retention and financial success are not at all that rosy--they are more consistent with the UK data, if not worse.  

But however disingenuous or optimistic firms reporting to Altman Weill were, the conclusion was still that "Clearly many law firms can improve their return on lateral hires.  Considering the time and money firms invest in the process, a baseline benchmark for lateral success should be at least 80%.  In the future, we expect firms to devote more attention to the specifics of lateral portfolios, including detailed profitability analyses, and to manage their recruitment, integration and cross-selling efforts more rigorously."

The list of pitfalls in lateral hiring is long, as many commentators have pointed out--and centers on the many unknowns and unknowables that haunt both the incoming partner and the firm hiring him/her, such as why the move is really being made, what book of business the new firm can truly expect, what practicing at the new firm will feel like to the partner and vice-verse, and how well the firm can integrate the partner.

And the potential exposure is not limited to the lateral simply not working out, although given the expenses and time involved in landing a lateral, those costs are high.  While making some changes from one workplace to the other only requires perusing the employee manual, major differences often exist in both the form and substance of practice, some of which are not easily communicated.  Differences in administrative matters, like conflict checks and intake procedures (which candidates from the corporate world rarely have experience in), can impact bottom lines and expose firms to significant liability. Similarly, bringing in laterals from defunct or soon-to-be-defunct firms who bring work with them can trigger liability to the old firm's creditors under the unfinished-business doctrine.

The other fall-out from lateral hires is one that is harder to quantify but which has a real impact on firm culture and success. The deal given laterals is highly scrutinized by the-partners-who-have-been-there-along. The individual reactions to the firm's offer of (usually) rich deals can end up being corrosive--critical assessments of what is so attractive about the lateral, whether they are competition or support for the other partners in the firm, how they appear to be delivering on financial promises and how they interact (arrogantly?) with existing partners can make or break a culture, regardless of any bottom-line improvement.  Don't underestimate the importance of firm-wide as-complete-as possible-buy-in for incoming laterals--and active problem-solving before the personal tensions get to a breaking point.  Finley Kumble, Howrey and Heller Ehrman all had other problems, but adding laterals ineffectively, and eventually, toxicly was certainly toward the top of the list of their sins.

Nonetheless, we proceed apace with the old "solutions" that resulted in those debacles--DLJ Piper hires the $5 million lateral with great fanfare and follows that up with hiring its Global Co-Chairman laterally.  Frank Burch, who serves as DLA Piper's other global cochair, assures us that "[W]e didn't hesitate for a second and worry about the fact that the guy was not in the firm."  Yet I can assure you that regardless of the managing committee at DLJ Piper's worry-free hire, there are a lot of partners there who aren't as serene.  And who are also wondering why their pay is only a fraction of the $5 Million Man.  Spread in pay is one of the insidious results of lateral hires.  And our compensation systems that prize individual performance not only fuel competition but enable laterals--both to come to your firm and leave from your firm.

Anger, resentment, jealousy.  These are the things that Finley Kumble, Howrey, Heller Ehrman and others were made of.

Dan Bowling, a former Big Law partner and Global Head of HR for Coca-Cola Enterprises, points out that law firms could use some of the advice in Hiring for Attitude by Mark Murphy.  “Eighty-nine percent of the time, if a new hire fails, they fail for attitude, not for skills,” according to Murphy.  While we could go into the finer points with Murphy of how different lawyers are from the rest of the hired herd, we might also benefit from looking at what companies across the country have learned. 

Pre-hire assessment and post-hire integration are both critical, not just to realizing the financial goals a proposed hire promises, but in some real sense also to save your firm.

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