Cravath, Swain & Moore on Dec. 28 announced 2011 associate bonuses, and a handful of New York-based law firms matched them within a few days. ABA Journal podcast moderator Stephanie Francis Ward and Bruce MacEwen of Adam Smith, Esq., discuss how Wall Street law firms—and those that would like to be seen as Wall Street law firms—decided on the numbers.
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Stephanie Francis Ward: 2011 has been a crazy year, money-wise. Many big firms made substantial profits in the past 12 months, but many big firm clients still maintain the young lawyers are paid too much money. That being said, what will year-end associate bonuses look like, and what sort of things are playing into management’s decisions about how much they’ll give? I’m Stephanie Francis Ward, and that’s what we’re discussing today at the ABA Journal Podcast. Joining me is Bruce MacEwen, president of Adam Smith, Esq. The consulting group focuses on law firm business and economic issues. So Bruce, let’s get straight to what many people want to know. What are Wall Street law firms going to be paying for associate bonuses this year? Also, how do you think they reached their decision on that number?
Bruce MacEwen: I think that probably the median of the range–of course, it’s going to be the smallest for first years and the most for seventh, eighth years–but I think the median of the range will probably be in the $20,000-$25,000 range at Wall Street firms. It could be higher, I’d be very surprised if it’s less than that.
Stephanie Francis Ward: Why do you think that?
Bruce MacEwen: That’s kind of a little bit below the going rate of recent years, and obviously we’re still in an extremely challenging economy, but I think for firms to, heaven forfend, eliminate bonuses or substantially cut them back would be seen by the market as a sign of weakness. Even a $10,000 bonus would be viewed as the functional equivalent of zero.
Stephanie Francis Ward: And when you say the market, you mean other law firms, right? You don’t mean clients?
Bruce MacEwen: Well, you know, clients–it’s funny. Clients are probably the constituency with the least voice in all of this, or the voice that’s least listened to in any event, but the people that the firms are playing to, their audience, if you will, are primarily lateral associates, and to some extent, their own partners, because we are, as you know, an extremely prestige-driven industry; irrationally so in my view, but that’s a topic for another day. And partners want to know and lateral associates want to be attracted to firms that seem to be on top of the game, on top of the market.
Stephanie Francis Ward: Well, I’m intrigued now because I certainly do agree with you, the profession is very image-conscious. Say someone that was respected in the community said, “You know what, we’re giving bonuses worth ten grand this year.” What would happen? I suspect that some managing partners might kind of like that, but just wouldn’t have the nerve to do it first.
Bruce MacEwen: I think many managing partners would like that, and I’ve had a bunch of conversations off the record–you know, when the spring bonus round erupted last year, if you recall, the view behind closed doors was almost universal that this was insane. But of course, nobody could say that, even though everybody believed it. You know, this brings me–and I think you were going there–this brings me to another aspect of our industry which I continue to find fascinating. You asked a second ago, “What if one firm did something different, paid ten grand,” because it’s a lousy economy, and you know, a lot of people–walk downstairs, go out on the sidewalk, ask a dozen people at random if a $10,000 bonus would be nice, and I guarantee you all 12 of them are going to say, “That would be great in this economy.” But we are sheep as an industry, and it’s extremely hard for any firm to depart from the pack, even if it’s the most sensible business thing to do. So from a funny perspective, I find the whole concept of associate bonuses confirmation that law firms are not yet run like businesses.
Stephanie Francis Ward: And do you get the sense, are most firms still doing the lock-step bonuses for associates, or is there some change to it?
Bruce MacEwen: There’s a little bit of change, but it’s only at the margins.
Stephanie Francis Ward: Does that tie into what you just said? People are afraid to change?
Bruce MacEwen: They’re afraid to change, yeah. And everybody–mostly everybody’s afraid to be different. Everybody’s afraid to fall out of step with the industry. One of the interesting things that I think is going on–and I don’t know if this is the economy where we’ll see this happen–but one of the things that started to happen before the Great Recession was, for example, I saw this most clearly in the rise of starting salaries to a $160,000 in New York and major markets–the elite firms, I think, were driving a stake in the ground saying, “We’re gonna make it tougher for wannabe firms to follow.”
Stephanie Francis Ward: And they succeeded.
Bruce MacEwen: Yeah, “We’re going to $160,000 because we can. And if you wanna suck it up and follow us, be my guest.” We might see something similar in bonuses in this environment.
Stephanie Francis Ward: Well, would you see a crash and burn though, like when they stuck that stake in the ground before and upped it to $160,000 and then the ones that couldn’t quite keep up laid off people in droves the next year. Do you think it would come to that? Is it going to be that hard for people to meet this 20-25K bonus?
Bruce MacEwen: I don’t think the situation is that dire as it was a couple of years ago, no. And we had–we had two classes of law students piling up on top of each other and things like that. That was as bad as I’ve ever seen it in my career, but I certainly think that–this is a ratchet you know? This only goes one way, it only goes up. And I think that the pressure on some of the non-elite firms is going to begin to see some of them sort of falling by the wayside.
Stephanie Francis Ward: Well, that leads to my next question. Let’s say your prediction is right, and the Wall Street firms go with $20,000-$25,000 bonuses, how are big firms headquartered in other parts of the country going to follow do you think?
Bruce MacEwen: That’s an interesting question. I mean, this is one of the things that confounds me a little bit about our industry, is that there has been an increasing attempt to view New York as the standard setter or standard bearer for the national market. So when New York went to $160,000, it used to be that, say, D.C. would be at $145,000, you know, and places like Atlanta and Dallas would be at maybe $110,000, which is probably a rough and ready approximation of the cost of living, so that you could say the seat of your pants way that everybody was kind of being paid the same in terms of purchasing power. But what happened, of course, right before the Great Recession was the New York standard’s $160,000 let’s say, became the standard in D.C. and Boston and L.A. and San Francisco, and then you know, Atlanta and Chicago and Dallas and Houston and places where frankly it was more money. And it really began to put pressure on some of the firms that have not traditionally been New York powerhouses, because they had so many lawyers outside of New York expecting $160,000.
Stephanie Francis Ward: Okay. And I’m curious too if your estimate of the $20,000-$25,000, do you think that includes the firm management’s estimate about what clients will find acceptable? Or is it just clients like to talk about paying associates too much, but they never actually do anything with their actions, they just talk about it?
Bruce MacEwen: No, I think you’ve put your finger on something. I think a few years ago, managing partners, firm leadership may have paid lip service to what clients thought, but I don’t think they really cared. Their audience was really other firms and their own current and future associates. But I do think managing partners have gotten religion now about paying attention to clients. For one thing, clients are not bluffing anymore about what associates earn. They used to complain, and to the extent that they had a point–the only point they had frankly from an economic perspective–was that the more law firms paid, the more they presumably had to pay people to come over to go in-house, and that was a valid economic point. But the other point that law firms just didn’t know how to reward their own associates is nonsense. If I’m gonna buy a BMW, I don’t care what it pays the assembly line workers, do I? That’s their problem, not mine.
Stephanie Francis Ward: Right. Now, a few years ago, most big firms felt like they needed to pay associates large salaries and bonuses to attract the top talent. Given the lesson that the profession has learned over this Great Recession, as well as the less and unfortunately poor law students have learned, is there still a feeling you think today that the firms need to keep up with the bonuses and salaries to attract and keep good young lawyers from the right schools?
Bruce MacEwen: Sure, of course. You want the best and the brightest. Everybody from Harvard Law Review. I think we have two funny things going on here. I mean, the short answer to your question is yes, I think firms still feel incredible pressure to pay the “going rate” to make sure they get their fair share of the best and brightest. But you might ask yourself, “Why is that?” And that’s where I want to step back for a second. I mean, imagine the kind of graduate employment market that exists in almost every other industry, and that’s a market where there’s a kind of a curve for demand and basically what graduates face in those other markets is they face the tradeoff between compensation and training. By that I simply mean that there are firms in those other markets–and I’m thinking consulting, investment banking, advertising, marketing, publishing–there are firms in those markets that pay pretty poorly but offer terrific training, and there are other firms in the same markets that pay very well, but treat you poorly. And that seems to be a stable market in every other industry but ours. And if you think about it, it’s logical from the graduate’s point of view. Do I want to sacrifice my take-home compensation but get great training, or do I want to make all the money I can and I’ll worry about the future later? I certainly know which one of those options I would pick, but that’s not an option that exists in our industry. Your only option is to get paid very well, and frankly, not be treated very well.
But there’s one other thing going on here. We talked about–you mentioned lock step bonuses, and we’ve talked about how firms feel compelled to match the going rate in everything. This to me is part of the problem that we just touched upon, where there’s one and only one going rate, and that’s that I think firms, by matching each other, are delivering the message to associates that we view you all as fungible, because we’re going to pay you all the same amount of money. And therefore, you know, you hear firms saying, “Well, why couldn’t we go to $145,000? We’d still get great students. I mean, that’s a lot of money.” The answer is no, it’s not going to work that way, because to the students, they have no real way of differentiating between firms. Let’s face it, they just don’t know that much about firms when they graduate. So to them, the difference between $145,000 and $160,000 is a highly material difference. If they can get an offer from the firm at $160,000, they’re going to take it.
Stephanie Francis Ward: That’s interesting, because I mean, it’s less than $20,000, but you might have a great experience somewhere else but be making $145,000.
Bruce MacEwen: Yeah. You know, I would certainly–if I had started after graduate school in a different industry, I would have certainly opted for the segment of the market that trained you very well and we’ll worry about total comp later. That’s making an investment in your career, but firms are saying, no, you’re all fungible.
Stephanie Francis Ward: Do you think these bonuses–are they the best way to reward associates, and do you think that bonus systems create better workers?
Bruce MacEwen: No.
Stephanie Francis Ward: Why not?
Bruce MacEwen: No, and no. You know, I may be old fashioned, but I’m a capitalist at heart, and I believe in meritocracies, and a lock-step compensation system, I don’t care if it’s ninety percent salary and ten percent bonus or fifty percent salary and fifty percent bonus, as long as it’s lock step for everybody, and there really is no merit involved, it’s not a way to motivate employees or to really generate people who want to get training and want to get better and better at what they do. It doesn’t matter within the bounds of competence and legality presumably, it doesn’t matter how you perform.
Stephanie Francis Ward: When you talk about that idea with clients, can you share with me what their reaction tends to be?
Bruce MacEwen: Clients find it preposterous the way we compensate associates. They simply do not understand how a compensation system can be divorced from performance factors. And by performance factors, I should hasten to add, I don’t mean billable hours. You can–I think you can have–well, I know because I’ve seen these people in action, I’ve worked with them–you can have somebody who bills 1,800 hours a year who’s really an excellent lawyer and somebody who bills 2,200 who’s just putting in the time and punching the clock, as it were.
Stephanie Francis Ward: Okay. So I want to make sure I understand you correctly. I know there has been a lot of talk about changing things with the firms, about how to compensate associates, not from client calls, but you’re saying that it’s mostly talk and that nothing has actually become action for the most part?
Bruce MacEwen: The only way we’ll know that it’s more than talk is when a firm begins to depart from the lock-step market. That’s the only thing, in my opinion, that will say there’s actually change afoot.
Stephanie Francis Ward: Do you have any sense of, say, how many of these firms have departed from the lock-step bonus system?
Bruce MacEwen: Well, for public announcement purposes almost none have departed from it. I think the question is there’s the public announcement, and then there’s what else is going on, really. And we saw a little bit of this disconnect in the Great Recession when, as you alluded to earlier, a lot of firms were forced to resort to historically unprecedented layoffs, and a lot of firms tried to somewhat cosmetically put a different face on that by saying that some of the layoffs were performance related, and not economically driven. And I think that unless we had a whole couple of years of law students who were far inferior to their predecessors, that’s probably not exactly the case. So it’s–you know, what firms say is one thing, and what they actually do is another. But you don’t hear anybody say they’re departing from lock step.
Stephanie Francis Ward: Well, have you had a chance to speak with many of the associates about what they think about bonuses and what do you think they would prefer? Do they like these lock-step bonuses, or maybe they’d prefer something else as well?
Bruce MacEwen: You know, law students and associates are–well, they’re lawyers in the making, and they are extremely risk adverse. I find this odd, just on a personal level, because I’m not. But it’s true. And you’re kidding yourself if you think it’s otherwise. So I think they prefer, in a way, the certainty of lock step. You would think–I mean, I certainly grew up thinking that anything that was a race to the top I was going to do fine, thank you. But that’s not the way the majority of students and associates think–that I’ve spoken to–think. They would rather make sure that they’ve got the bird in the hand, if you will.
Stephanie Francis Ward: I would think ones who are entrepreneurial in nature would prefer it the other way, but I don’t know how long those types are going to stick around the big firms, for the most part.
Bruce MacEwen: That, you’ve put your finger on it. If you do have an entrepreneurial bent, I think you will find that there aren’t too many people like you in big law, and you’ll either lose your entrepreneurial bent or you’ll leave. And frankly, we need a lot of entrepreneurs in the country right now, so I’m hoping most of those people leave.
Stephanie Francis Ward: Well, you mentioned the spring bonuses earlier. Do you think we’ll see them again in 2012?
Bruce MacEwen: You know, I hope not, because I think they were fundamentally irrational, but on the other hand, that’s never stopped law firms before.
Stephanie Francis Ward: Well, these bonuses, will they be an indicator of 2012 salaries, and if so, how?
Bruce MacEwen: You know, that’s actually an interesting question. I’m–as you may have gathered, I’m a big believer in a relatively high component of variable or discretionary pay and a relatively smaller component of fixed pay, so I would hope that the $160,000 salary structure stays in place for several more years, and that an increasing component of overall compensation is in the form of bonuses, actually based on performance. You know, the performance of the firm, obviously overall its economic health, but also the performance of the individual that particular year or over a rolling period of a few years.
Stephanie Francis Ward: Okay. Well, Bruce, I think that’s everything I have for you. Did you want to add anything else?
Bruce MacEwen: No, the only other thing I think I’d like to leave your listeners with is the thought that if we stood back and imagined this same compensation structure in almost any other industry, we would think that it was bizarrely managed, and the reason that law firms can do it is they’re competing with other law firms, and as long as that’s the case, there is no compelling reason to change and lawyers, if given the option, would prefer not to change. So I think this is going to be with us for quite some time until law firms maybe see competition from non-law firms.
Stephanie Francis Ward: Thank you so much for your time, I really appreciate it.
Bruce MacEwen: My pleasure.
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Stephanie Francis Ward
Bruce MacEwen is the founder and president of Adam Smith, Esq., a consulting group that works with lawyers, law firms and legal vendors. He also writes at a website of the same name. Previously MacEwen was an in-house lawyer with Morgan Stanley/Dean Witter, and he practiced law at Shea & Gould.