Cravath Sets Year-End Bonus Structure & Good Example For Firm Management

In one day, when December finally arrives, associates will start to worry about their end-of-the year bonuses. It’s at this time that most companies look to match the bonus announcements established by New York law firm Cravath, Swaine & Moore LLP.

Although Cravath is one of the nation’s oldest law firms, it is one of the market’s newest leaders. Just prior to the 2008 economic downturn, Cravath was the first to pay “special” bonuses on top of traditional, annual bonuses. When the recession hit full force, big law firms, like Skadden, tried to continue their full, pre-recession payouts. But, Cravath, anticipating a cold long term, announced that it would only pay half-sized bonuses to its associates instead.[1]

From that point forward, firms looked toward Cravath to set the market pace for associate compensation and bonus structures.

So, on Monday, law firms were anxiously awaiting Cravath’s announcement about year-end payouts for partners and associates. Unfortunately for the industry, however, Cravath is not optimistic about its future outlook. The firm decided to pare bonus levels to that of 2010.

Although 2010 bonuses were higher than the previous year’s, payouts continue to pale in comparison to pre-recession rates.

“The senior-most associate attorneys at Cravath—lawyers with about seven years experience—will take home a bonus of $37,500, an increase of $2,500 from 2010. The firm’s most junior associates, some of whom have only been with the firm for several months, will pocket an extra $7,500 for 2011, the same amount as last year. Payouts to the rest of the associate ranks will fall between the two figures, depending on each lawyer’s seniority,” reports the Wall Street Journal.

Nevertheless, firms should look at Cravath’s financial move less like an industry prediction and more like a point for emulation.

A firm’s most valuable asset is its human capital. At the same time, in this economy, attorney fee arrangements and associate compensation must adapt to weathered times. A firm looks to meet both its bottom line and the expectations of its clients. This will be, on occasion, to the detriment of high, year-end bonuses.

“‘It could just be that the firm has decided it wants to do other things with its money, like prepay some expenses,’ said Mr. Zeughauser,” reports the Wall Street Journal. “Law-firm consultant Peter Zeughauser said it was hard to divine too much about Cravath’s year from its bonus numbers. According to the American Lawyer magazine, profit numbers were up at the firm in both 2009 and 2010.”

If the industry leader is setting anything, it’s not a financial forecast for the industry, it’s an example. Law firms should worry less about the image of cutting their bonus structure, and more about surviving this recessed economy.

Managers must make tough decisions, but employees will be more understanding so long as firms make efforts to communicate the reasons behind their decision-making.

This year, work toward greater transparency with your employees. Explain your new firm bonus structure to associates. Are you transferring this extra revenue to pay off expenses? Or, will the money go toward new hires? Are partners and junior associates alike receiving cuts in their year-end bonuses?

These days, clients are pressuring firms to work more for less. After all, clients are also feeling the financial burden of the economic recession. But, as long as your attorneys and clients are all equally and fairly informed about the financial capabilities of the firm, you will retain both, and at higher rates.

Bonus payouts may not increase this year, but with the right transparency measures, respect for your firm and its way of business will.

-WB

[1] See article about Cravath here.

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