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.