Bonus Season May Not Make Everyone In BigLaw Merry
Law360, New York (November 29, 2016, 8:51 PM EST) — Even though a handful of elite law firms have quickly proclaimed they plan to match the six-figure associate bonuses revealed on Monday by Cravath Swaine & Moore LLP, experts say many BigLaw firms will likely think twice before following suit after hiking associate pay earlier this year.
Cravath ushered in associate bonus season Monday by announcing year-end pay perks in line with those it offered last year, ranging from $15,000 for junior attorneys to $100,000 for its most senior associates. And while a few elite law firms have already promised to match Cravath, some industry pundits say the majority of BigLaw firms will likely consider instead opting for smaller bonuses this year as they aim to improve profitability.
In June, Cravath raised its base pay for associates from $160,000 to a starting salary of $180,000, setting a new benchmark for the industry and prompting a flood of law firms to follow suit with raises of their own.
The extra expense of those pay hikes may cause a large number of firms without the same profit margins as Cravath and its direct competitors to take a more conservative approach to bonuses this year, according to Kent Zimmermann, a legal industry consultant at Zeughauser Group LLC.
“I think that more firms matched Cravath’s base salary increase than needed to match it, and some of them are paying for it in the form of decreased profitability,” Zimmermann said. “That experience may cause some to think twice about matching the Cravath bonuses.”
Mark Jungers, co-founder of legal recruiting firm Lippman Jungers LLC, said he believes law firms will likely cut corners where they’re able to this bonus season, walking a fine line between remaining competitively strong in the fight for lateral legal talent and reducing operational costs.
“I think maybe you’ll see a little more bonus compression than you would have otherwise, given that salaries went up … especially since some members of management may think associates got presents earlier in the year and there’s no need to fawn all over them a second time,” Jungers said.
Within a month of Cravath’s announcement in June that it would raise associate pay, more than 100 law firms had followed its lead. Many legal industry analysts at the time questioned the wisdom of raising pay for those firms that don’t directly compete with Cravath for talent, citing the need to maintain strong profit margins, as well as pressure from clients to maintain affordable fees for legal services.
Within four months, the data began to show those pundits may have been on to something. Earlier this month, Citi Private Bank’s law firm group found that expenses ticked up at law firms during the third quarter, driven by increased attorney pay, while law firms’ revenue growth actually slowed during the same period, taking a chunk out of firms’ profitability. The revenue growth law firms did see was largely propelled by rate hikes rather than growth in demand.
With Cravath’s bonus announcement still just a day old, the question remains as to how many law firms — outside the select few that almost always match top-of-the-market bonuses — if any will follow suit, given the financial pressures they face.
As of Tuesday evening, 10 elite law firms have gotten on board with the Cravath bonus scale, including Paul Weiss Rifkind Wharton & Garrison LLP, Davis Polk & Wardwell LLP, Milbank Tweed Hadley & McCloy LLP, Simpson Thacher & Bartlett LLP, Weil Gotshal & Manges LLP, Willkie Farr & Gallagher LLP, Holwell Shuster & Goldberg LLP, Cleary Gottlieb Steen & Hamilton LLP, Proskauer Rose LLP and Debevoise & Plimpton LLP, according to internal memos published online by legal blog Above the Law.
But, according to Jungers, there likely won’t be more than “a dozen or so” law firms that do match. Those that do, he said, are the firms that operate with the highest profit margins, which allow them to absorb costs related to increased compensation.
Of the firms that have so far announced associate bonuses matching Cravath — as well as Cravath itself — all but one are among the top 25 law firms in the U.S. in terms of profits per partner levels, all exceeding $2.1 million, according to recent rankings released by the American Lawyer, and one is a boutique for which financial data is unavailable.
But not all of the firms that raised associate pay earlier this year boast the same levels of profitability, with some dipping below $1 million in profits per partner.
“The are serious issues with profitability at certain firms. The salary increases that came earlier this year are one of the factors impacting profitability. Trying to follow the bandwagon doesn’t make sense for a lot of firms,” said Michael Jude Di Gennaro, a senior director at legal recruiting firm Lateral Link Group Inc.
He suggests that, instead, law firms that aren’t direct competitors of firms like Cravath and Simpson Thacher should use a bonus system that doesn’t offer blanket bonuses across the board and instead rewards them with an uncapped bonus based on financial factors like the firm’s profitability and the associate’s overall contribution to the firm.
That contribution can include both hours billed, as well as business generated, he said.
“It is somewhat more like a profit-sharing model where associates have more stake in the game than they currently do. And they’re not just putting in hours for the sake of hours, but getting more involved in the inner workings of the firm and its financial health,” Di Gennaro said.
The model encourages associates to be more involved and hone their business development and relationship management skills, he said.
“I think they should use the bonus more as a truly incentivizing tool to get associates interested in the firm and its financial health at a much earlier stage in their career so they can start thinking about what it’s like to be a partner,” Di Gennaro said.
By Aebra Coe
–Editing by Philip Shea and Katherine Rautenberg.