Law Firm Bonuses Might Be Headed For Overhaul

By Anne Urda

Law360, New York (November 12, 2008) -- With the economy continuing to tank and associates increasingly worried about their jobs, law firms may be forced to abandon the lockstep bonus structure that they have traditionally embraced in favor of a more merit-based approach in the future, some experts say.

Over the past year, a staggering number of law firms have slashed their work force, with White & Case LLP becoming just the latest to announce massive layoffs in 2008.

The firm shocked the legal community on Tuesday by sending 70 associates and 90 support staff packing, with the group scheduled to join many other lawyers in the unemployment ranks.

“Right now I don’t think associates are concerned if bonuses are lockstep or merit-based what with all the layoffs happening,” said Ann Israel, owner of legal consulting firm Ann Israel & Associates. “I think they are more concerned that they have a secure job first and foremost and then they hope that the partners will be generous enough to give out bonuses at the end of what is shaping up to be a disastrous year.”

But while some firms are floundering, others firms have already committed to handing out bonuses this year and new attention is being paid to the way this monetary thank-you is doled out.

Most big-name law firms, like Debevoise & Plimpton LLP, favor a lockstep bonus model, which pays out the annual rewards based on seniority.

Proponents of this model tout the collegial atmosphere that the policy tends to create, pointing out that fellow associates are not consumed with envy over what others at the same level might have gotten since they are all making the same.

By removing the arbitrary element from the bonus decision-making process, firms seek to create associate harmony, and the lockstep system can often result in a big payout for everyone.

Last year, Cravath Swaine & Moore LLP shocked the legal world by offering an astounding $45,000 to $110,000 in bonuses based on seniority, with places like Sullivan & Cromwell LLP and Simpson Thatcher & Bartlett LLP soon following suit, according to the blog Above the Law.

But the question remains about whether everyone at the firm actually deserves such lavish bonuses, according to Alan Miles of Alan Miles & Associates, a Los-Angeles based legal search firm.

“Well, if you do a lockstep, I think that it creates less friction, and you don't have people going why did he get a bigger bonus than me?” he said. “But that can punish hard work and fail to reward the right people.”

While it would be nice to think that everyone contributes equally to the firm, the fact remains that some people work harder than others, according to Miles.

“I think a merit-based system is fairer because they reward what the associates do,” he said. “I think that's fair that the person who bills 2,300 hours should get more than the person who bills 1,900 hours.”

A lockstep method may mean a friendlier environment on the outside, but it can also breed resentment on the inside among those who feel they are doing more work.

Orrick Herrington & Sutcliffe LLP, which already revealed that its 2008 bonus structure will remain in place, is supposedly considering scrapping the lockstep structure of associate salaries altogether.

Though Orrick chairman Ralph Baxter praised the lockstep structure in an article for the American Lawyer this past summer, he also questioned whether the system would continue to be the right model in the future.

But many associates purportedly oppose the elimination of the lockstep model, which guarantees everyone some sort of end-of-year payoff.

They argue that a switch from the lockstep model would do more harm by shrouding the bonus decision process in secrecy, which could lead to associates being underpaid for their efforts among other problems.

Miles concedes that the merit-based system can be misused, but maintains that it is still the better way to reward people.

“I suppose there could be shenanigans with this system, with some partners having a favorite person that they speak up for,” he said. “No system is perfect, but I still think you are gonna be much closer to that idea with a merit-based than lockstep system.”

Kirkland & Ellis LLP, which is famously tight-lipped about the specifics of its bonus structure, rejects the idea of a lockstep purportedly on those same fairness grounds.

But other firms, like Cadwalder Wickersham & Taft LLP, appear to be straddling the bonus model fence, giving the full payout to those that bill 2,000 hours and above.

The idea behind the hybrid bonus model appears to be an attempt to be fair in the distribution policy but also to reward those who seemingly worked the hardest for the firm.

This system could also lead to problems, though, as evidenced by whispers that some associates pad their hours in order to hit the established mark.

“Something tells me that there is a bonus [in this type of system] for reaching that threshold, but it's not a total bonus,” Miles said. “But if it is just hitting the higher hours and you are going to get the full bonus, then that is kind of a lockstep because it still does not address the quality of the work.”

With the economy in dire straits, however, firms may no longer have the luxury of favoring a lockstep structure, according to Miles.

“Given the economy, you can't just reward everyone anymore to be nice,” he said. “You have to go to a merit-based system and give to the people that deserve it.”

But if firms continue to experience financial difficulties and layoffs on as wide a scale as this past year, all the bonus talk may be moot.

Recently, Katten Muchin Rosenman LLP cut 20 people loose, a move that came on the heels of the dissolution of Heller Ehrman LLP and more layoffs at Sonnenschein Nath & Rosenthal LLP and Clifford Chance LLP.

Other firms that have laid off attorneys or support staff in the past year or so include Cadwalader Wickersham & Taft, Duane Morris LLP, Fried Frank Harris Shriver & Jacobson LLP, Thelen Reid Brown Raysman & Steiner LLP, Dechert LLP, Jenner & Block LLP, Powell Goldstein LLP, Holland & Knight LLP and Sutherland Asbill & Brennan LLP.

“I think this is just the tip of the iceberg,” said Miles. “Who knows if there are even going to be bonuses?”

Israel maintains that with the economy currently in decline, law firms' long-term approach to the bonus structure also remains in flux.

“I am not certain that firms are trending one way or another with their bonus structure these days as they struggle to determine how bonuses will be awarded this year (and if they will be awarded),” she said. “The Dow fell another 400 points today — it’s difficult to talk about bonus trends in this kind of economic market since partners are very liable to use this market to hold back on bonuses.”