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Prudent or Plentiful? How Law Firms Decide Year-End Associate Bonuses

By Stephanie Francis Ward

December 3, 2012, 2:30 pm CST

Podcast transcript:

This ABA Journal podcast is brought to you by WestlawNext, the legal research platform chosen by over 40,000 legal organizations for their tradition of editorial excellence combined with the most advanced technology. Learn more at WestlawNext.com.

Stephanie Francis Ward: It’s almost 2013, and while many young lawyers are thankful if they have jobs, a lucky few at large law firms are waiting to see what they get for year-end bonuses. I am Stephanie Francis Ward and that’s what we’re discussing today on the ABA Journal Podcast.

Joining me are Barbara Kott, a managing director with the recruiting firm Major, Lindsay & Africa; David Lat, the founder and managing editor of Above the Law; and Peter Zeughauser, a legal strategist who often advises large law firms on strategic growth planning.

Do you think that some of the partners who decide this, have they ever talked about maybe coming out before Cravath?

David Lat: There are certainly firms that pay larger bonuses than Cravath. In terms of the large lock-stepped firms moving earlier than Cravath, I don’t think it’s happened in recent years as far as I can recall.

Barbara Kott: I also don’t remember in the recent years being anything either. Cravath, possibly Sullivan & Cromwell. But it’s historically these firms that come out first.

Stephanie Francis Ward: And Barbara, in the recruiting world, in terms of the size of a bonus a firm gives out, how important is that, do you think, to the lawyers that you serve to do placements with?

Barbara Kott: Well, it certainly makes an impact on the lateral associates who are currently working at the law firms. But I think where the real impact is found is with law school recruiting. You know, law students typically are not very educated in how to differentiate between the big law firms. One thing that they are sure about is that they are graduating with, you know, $100,000 of debt on their shoulders that they are going to need to repay. So these bonuses and I think associate compensation in general are extremely important tools for the firm to recruit out of law schools.

And certainly there is an element of associates who are moving laterally between firms that they are remaining competitive and that there are no signs of weakness, per se, in a firm that they may be looking to move to.

Stephanie Francis Ward: And it is such a small percentage of our country of the people who get these bonuses. Why is there such a fascination about the big firm bonuses, do you think? Dave, do you want to take that first?

David Lat: Yeah. I think there’s a couple of reasons. First, I think a lot of sectors of the legal profession do take their cue from the largest law firms in the country. You can think of them as the Am Law 100 or inspecting the American Lawyer rankings or the Vault 100 in terms of that set of rankings.

But for whatever reason, I think large law firms draw a disproportionate, perhaps, amount of attention in the legal world. Back end, there are a lot of people who, even if they no longer work in so-called big law, used to work there. And so I had this experience, having left a law firm to go be a prosecutor. And it’s that time of year when you hear about the bonus announcements and you think, “Wow, this is what I’m missing out on.”

[Laughter.]

Stephanie Francis Ward: And Barbara, what do you think?

Barbara Kott: Yeah, I think, Stephanie, the word “fascination” is sort of spot on here because I think that’s essentially really what it is, just a general fascination with what these Wall Street firms actually pay their associates. You know, it’s glamorized a bit. The Wall Street Journal will report on this. You’ll see something on the New York Times, most likely.

So I think people generally get sucked into the frenzy around it similarly to, you know, being interested in what vice presidents at Goldman Sachs may bring in on any given year. I think people are generally interested, whether big law associates or not, simply in what these Wall Street firms are paying.

Stephanie Francis Ward: Peter, I’m curious. When the news comes out of what Cravath is going to pay, generally what are partners at other firms’ reactions to the news?

Peter Zeughauser: Well, I think some partners are fascinated with the news or just curious about it. But I think it actually is useful to the management of other firms in benchmarking what they need to do to be competitive, and that’s why the leadership of large firms is interested in this.

Once you know what the top of the market is or roughly what the best firms are doing, then you can slot yourself in someplace in whether you want to be competitive with them or, or think that you need to be a rung or two down from them in order to be competitive.

And I think that’s why the leadership of large law firms thinks it’s interesting.

I do, I do think that there are firms challenging Cravath, Sullivan & Cromwell, Paul Weiss, Weil Gotshal, you know, Simpson Thacher, Davis Polk. The traditional bonus leaders. Firms like Quinn Emanuel, Kirkland & Ellis, Latham. And I think that we will see them moving more quickly in the future to make a statement that they’re in fact market leaders just as much as any of the Wall Street firms, and I think they’ll certainly be matching bonuses, and they’ll want to be paying more bonuses and some higher bonuses in some of those firms.

And so, so knowing where the traditional leaders are is important in terms of slotting yourself in.

Stephanie Francis Ward: Is there ever a sentiment when the news comes out and the partners might think, “Gosh, I wish it wasn’t that high. I really didn’t want to pay that much.” Or what are these people thinking?

Peter Zeughauser: Well, I think in a year like this, they’re, they’re, I don’t think they’re going to be thinking that. It’s–The bonuses are going to be relatively low, I would say, and they’re going to be glad that, that they don’t have to be higher.

But in years in which the bonuses have been more extraordinary, certainly there has been wonderment on the part of some partners and firms about why they have to pay such high bonuses. So, so this year I don’t think there is going to be a lot of discussion about whether or not to pay a bonus in this, in this range, in the range that we’re talking about.

Stephanie Francis Ward: Could you see a revamp of how big firms decide on bonuses and, and, and give them to people? Perhaps not this year but maybe sometime in the next decade?

Peter Zeughauser: Well sure, I do. You know, we saw one year when Gunderson bumped the first year associate salary, I think it was to $135,000 at the time or it might have been the $160,000 bump, but they came out way ahead of the market on that, and they set the market. And that was when Silicon Valley and the dot.com was really hot, and there was strong demand for associates in the Valley, and they wanted to pick off some of the associates that would’ve otherwise gone to New York.

And you know, as I indicated a moment ago, I think you’re gonna see more of that in the future with firms that are rivaling the New York firms in performance and the kind of work they’re getting, the kind of money they’re making. So you know, there’s probably a half a dozen or 10 firms in that category that I think may jump out ahead in the foreseeable future.

Stephanie Francis Ward: Dave, what do you think? Did you see a revamp on big firm bonuses?

David Lat: Well, one of the things I think you’re starting to see, and we’ve noticed it in the past couple of years in Above the Law covering this topic, is more firms are moving away from the lockstep system, where everyone of the same seniority is paid the same bonus. And increasingly they are being paid individualized bonuses.

So top performers might get more than what their Cravath counterparts might get in terms of seniority measured by your law school graduation, and then underperformers might get a smaller bonus or no bonus at all.

So I think that in some ways law firms are starting to look a lot like the corporate clients they serve. I mean, in corporate America your compensation is often individually determined as opposed to determined simply by how long you have been in the work force.

So that’s one trend I see, and I think you could call it a revamp of sorts, although a lot of the traditional Wall Street lockstep law firms will still keep to that system of paying by seniority.

Stephanie Francis Ward: Okay. And Barbara, how about you?

Barbara Kott: Yeah, I tend to agree. I think that we are seeing changes. There are some bonuses that are moving towards meritocracy-based rather than something lockstep. But you know, to call it a revamp, I don’t know how quickly it will happen or how many firms will be making these changes. I think we’ll see baby steps across the next few years.

But you know, the law firm business, it’s a risk-averse business, and it can be risk averse to change. So it’ll be interesting to see.

Stephanie Francis Ward: I’m curious, Barbara, with your lateral associates–to what extent would a bonus that’s not lockstep, that’s based on their performance, to what extent does that tend to be important or not important to your candidates?

Barbara Kott: You know, it’s an interesting question because one would think tying a bonus to performance would be a sought-after element for lateral associates who are moving between firms. But surprisingly, and perhaps it’s a result of our most recent economic downturn or maybe it’s just the risk-averse lawyers that we deal with every day, most seem very nervous about the idea of moving to a firm where bonuses are not lockstep.

Now, do I think that’s going to be a deal breaker for them? You know, once they consider all of the factors in the move? Probably not. But it does give more pause to associates than I would have expected.

Stephanie Francis Ward: Okay. And I know we’ve heard of the stealth layoff. I’m curious, and Dave, I’ll ask you this first. Do some firms have–I don’t know if perhaps if they just call themself–they’re not so great bonuses. Have you ever seen or heard of that?

David Lat: In terms of generally paying low bonuses or–

Stephanie Francis Ward: Yeah. And maybe not being completely honest about it or something like that. Trying to hide the fact that they’re not paying great bonuses.

David Lat: You know, honestly, I think what they often tend to do is they will go the individualized route where you don’t know what the compensation of your colleagues is. And then nobody has any way of knowing how much the people are being paid.

And so I think one of the concerns, going back to what Barbara was saying about these non-lockstep systems, is that they’re not transparent. You don’t know how much the other guy is making. So firms that are trying to reduce their compensation costs can certainly take advantage of this and lowball everybody, and people may not want to say it, how low their bonus is, because it’s almost like admitting that you’re not the best associate. So people who get low bonuses at non-transparent, individualized regimes may just keep quiet about it.

Stephanie Francis Ward: Well, I’m curious in where they set bonuses on performance, do you think that the associate college talk about the numbers to each other, or maybe they drop hints, or–

David Lat: It varies a lot from firm to firm. Sometimes with firms that have individualized bonuses, we will hear at Above the Law about the situation, and people will say, “Here are a couple of data points. I’m a 2005 associate and I billed this many hours and I got this much money. I have a friend who’s a 2008 and she billed this many hours and got this much money.” And so you can kind of figure out how a firm is doing generally.

But the other very clever thing about individualized bonuses is if you know somebody’s class year and billables, you can often figure out possibly who the person is. And so people tend to be a little bit cautious about disclosing this kind of information because many firm managements would not be pleased to hear that associates were revealing this type of compensation information, either to their friends or to a site like ours.

So as a result, there is a lot of silence on this issue sometimes.

Stephanie Francis Ward: Well, will you tell me, though, and I am assuming that when the bonus news does come out, a few associates would tip off your site? Generally?

David Lat: Generally that is the case. Occasionally some firm, especially a firm with good news, might want to provide us with a copy of their announcement or information about their distributions, often on a background basis. But in most cases we are hearing about the news from the associates.

And at lockstep firms, it’s not as controversial. It’s really very matter of fact because it’s just a matter of “Well, you graduated law school this year, you get this much of a bonus.” At the individualized firms it tends to be a more sensitive subject.

Stephanie Francis Ward: Okay. Peter, what is your sense of how partners feel about performance-based bonuses versus the lockstep bonuses?

Peter Zeughauser: Well, I think that varies from firm to firm. And even from partner to partner. I think there is a growing undercurrent of conversation in firms about whether hours-based bonuses–And let’s cut to the chase. When we’re talking about performance, generally what we’re really talking about is what David mentions. How many hours they bill and how hard the firm perceives the associate’s worked in terms of their average hours firm-wide over the course of the year, and then how any individual lawyer stacked up against the average.

And I think there’s a growing conversation in firms about whether that’s the right way to award bonuses. Because it’s antithetical to what clients want, particular for first to third year associates. I think associates’ reluctance to move to merit-based systems is partly because they don’t know it.

But generally I think even any associate, when it comes to bonuses, they worry about, you know, will they get the work, the hours, to justify the bonus? Sometimes the Devil they know is better than the Devil they don’t, so they stay in a place where they know they can get the 1,800 or 2,200 hours, whatever it takes to get the bonus.

I think there are questions arising in firms about whether that’s the right way to award bonuses. And so there is an emerging trend to take other factors into consideration than something that clients find unattractive.

Stephanie Francis Ward: Peter, have you seen any firms that have bonuses that are not awarded based on hours, and it’s performance? And they truly are awarded on performance, not hours?

Peter Zeughauser: I think there are. I think there have been a couple of firms that have done that. It’s a tiny minority of firms that have moved in that direction.

I think that conversation is really just getting underway as firms struggle with becoming more efficient and, and alternative fee arrangements that drive that and really disincentivized the production of hours.

And so I think firms are just starting to wrestle with that.

Stephanie Francis Ward: Okay.

Peter Zeughauser: I wouldn’t even raise it to the level of wrestle with it. I would go back to what I said earlier. I think there’s a conversation that’s taking place at firms about that. And I think it’s gonna take a little while before that would really kick in.

Stephanie Francis Ward: And Barbara and Dave, is that pretty much what you’re seeing as well?

Barbara Kott: Yeah. I mean, I think I would generally agree. In terms of the partner interest in associate bonus, I would say generally speaking there’s not a lot of interest in it. I think behind any closed door, partners will typically roll their eyes on this subject.

But you know, I think it’s right. Hours-based bonuses versus a performance-based system, it’s almost hard to say what’s the difference because I think especially in the junior ranks for associates, the hours are what make the performance.

Stephanie Francis Ward: Yeah.

Barbara Kott: But again, you know, I think we just go back to this idea of remaining competitive and just making sure that your range is aligned with your fellow Wall Street firms.

David Lat: I would agree with what Barbara just said. One of our partner columnists on Above the Law pointed out that in many cases, the rank-and-file partners aren’t even really involved in the determination of overall bonus levels. They might have input into how they review particular associates if the firm takes performance into account, but for the firms that go lockstep the decision, to the extent that you can even call it a decision, to match Cravath or the market is generally made by partners in management.

And so rank-and-file partners either might not be particularly interested or, as Barbara was saying, might roll their eyes at the topic. It’s not a subject over which they have a huge amount of control, in many cases.

Peter Zeughauser: Yeah, I would concur with that. It’d be extraordinary at large law firms for the rank-and-file partner to have any input at all on what the associate bonuses should be. Just doesn’t happen.

I do think that many of them will smile this year if David’s prediction is right, which I agree with, that the bonuses are gonna be like last year. I think they’ll feel relieved, and I think they roll their eyes in years where the bonuses are much higher.

Stephanie Francis Ward: So will the associates be smiling or frowning? I’m guessing frowning. What do you all think?

David Lat: You know, I’m actually think that we’re seeing a recalibration of attitudes. Above the Law, we launched in 2006, so we were around for some of the heyday of associate bonuses, and then we were around for the layoffs. And I think that associates are in many cases more grateful just to have jobs to pay off some of the huge debts that Barbara alluded to earlier, and I think there’s less of a sense of entitlement and less of a sense that they should be paid huge amounts. And many times they’re just happy to have gainful employment, especially if they were at their firms during the painful contraction of 2008, 2009, even into 2010.

Now, that’s not to say that firms, that particular associates who were worked like dogs or were treated harshly during the year and then receive what they consider a small bonus, won’t be upset. But I think that you’re starting to see a shift in associates’ attitudes on these matters. It’s–We’re no longer in ’06 or ’07.

Peter Zeughauser: I’d give a more nuanced answer. I think that associates at the big corporate shops, the traditional Wall Street firms, with one or two exceptions, will be happy to get a bonus this year, and I agree with David’s assessment.

I think at the big litigation shops that have had extraordinary years, and we’re gonna see some extraordinary numbers posted and extraordinary hours by associates, if those firms pay the same bonuses as the big corporate shops, I think associates are gonna frown.

On the other hand, if they get some recognition, even if it’s token, that they worked a lot harder this year, I think they’ll be happy.

Stephanie Francis Ward: Of course it’s impossible to know what’s going to happen in the next few years, but could any of you see bonuses for the next year or the year after that perhaps being smaller than what they were last year and what it sounds like for this year?

David Lat: I think a lot will depend on the performance of the firms. I think if firms continue to make incremental gains in profit, even if it’s incremental gain based on shedding expenses rather than growing revenue, I think the bonuses will probably remain at a similar level and if business takes off, perhaps will even go higher.

I don’t see them going much lower, necessarily, unless we see some kind of major economic shock. But hey, you know, it could happen. It happened in 2008.

Barbara Kott: Yeah, I agree. I agree with David on this. I would be surprised, assuming that sort of our economic trajectory slowly remains the same, that we would see much of a difference. I don’t expect lower bonuses unless we fell into sort of a double-dip recession or something and, you know, with economic recovery slowed immensely.

You know, there won’t be, I don’t think, a mistake like in 2008 where one firm sort of decided to offer bonuses that were aligned with these larger 2007 levels and then quickly the next year went back to this Cravath standard. I think that there is going to be a more conservative approach moving forward, and I don’t think we’ll see huge increases, nor would I expect a decrease.

Stephanie Francis Ward: Peter, what do you think?

Peter Zeughauser: I agree. I think that the level of bonuses we’re talking about this year are modest and reasonable, even in a relatively flat year. I wouldn’t expect bonuses to go down unless something cataclysmic happened in the market, like another 2008, which I don’t expect will happen.

And I think it’s going to take a significant recovery before bonuses go up, although I would come back to–I think the competitive set is changing somewhat. We used to talk about the Wall Street firms because they were the most profitable firms and the richest of the rich. And I think now we see some other firms in that group with north of $2.5 million in profits per partner, and I think those firms have their own set of issues to deal with in terms of being competitive for the best, best associates.

And we may see a different competitive set. I suspect we will see a different set. I think if the economy stays the way it is and the disparity in performance between firms that have, let’s say, a 70 percent litigation mix, big litigation mix, versus a 35 percent big litigation mix. Sixty-five percent corporate dragging them down versus 35 percent corporate dragging them down, if that persists for another year, I think you’re gonna see the big litigation jobs start to set the market. And it won’t be the big transactional jobs setting the market.

I just don’t get it how the big litigation shops can continue making the demands on their associates and having as robustly profitable years, distinctly different from the big transaction shops, and continue to pay the same bonus.

Stephanie Francis Ward: And maybe this is a crazy question, but do you think, Peter, have any of the firms ever discussed or thought about doing away with bonuses?

Peter Zeughauser: I’ve never heard of it.

Stephanie Francis Ward: That would, that would be suicidal, I would imagine.

Peter Zeughauser: Maybe in their deepest, darkest dreams. They’ve spoken in their sleep about it. But I don’t think there’s any real consideration of that. I think that generally they feel that bonuses are a healthy part of the compensation package and serve to reward people who have worked really hard and contributed a lot to the success of the firm, and it’s just–Going back to the corporate America analogy, it’s just good practice to do it.

So I don’t think they’re gonna go away.

Stephanie Francis Ward: Do any of you think that we will see spring bonuses next year?

David Lat: Oh, the associates wish, but I tend to highly doubt that. You know, it seems that 2012 has not been a great year for transactional practice, and the law of large firm profitability is driven by that. And I don’t think you would see spring bonuses unless you’re seeing a very unusual half. But I could be wrong. I wasn’t expecting the spring bonuses that showed up in, what was it? Last year. In 2011. So who knows?

Peter Zeughauser: Well, I have to agree with David. You know, law firms have surprised me before, so I could be wrong, but I do speculate that we won’t see them this time around.

You know, the bonuses, the spring bonuses specifically, were implemented sort of as this retention tool from the firms when most lateral associate moves happen in the first quarter of any given year. So associates wait for their year-end bonus, thank you very much, and boom, they’re looking to move to other firms.

So I think the point of these bonuses was to retain those people through that first quarter. The problem is that the spring bonuses, from what I saw, seemed to dissuade no one from making a lateral move. The firms that were recruiting these associates had no problem making them whole.

So I think because the point of these bonuses maybe was not successful, I would be surprised if they repeated it next year.

Stephanie Francis Ward: All right. And that’s everything I have for today. I want to thank you all so much for your time. I appreciate it.

This ABA Journal podcast is brought to you by WestlawNext, the legal research platform chosen by over 40,000 legal organizations for their tradition of editorial excellence combined with the most advanced technology. Learn more at WestlawNext.com.

Higher associate bonuses came from Cravath Swaine & Moore in 2012. Naturally other firms that see themselves—or want to see themselves—as competitors with the Wall Street firm followed suit.  For the most part, partners and associates are happy with the numbers, guests tell ABA Journal Podcast moderator Stephanie Francis Ward. But there could be big changes in the future.

Related articles:

ABAJournal.com: “Cravath Boosts Year-End Bonuses, Will Pay $10K to $60K; Last Year’s Ceiling Was $37.5K”

ABAJournal.com: “Tis the Season: Skadden and Simpson Thacher Match Cravath Year-End Bonuses of $10K to $60K”