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Nationwide Pay Freeze Watch: Arent Fox Takes This Opportunity to Bring Back Deferred Compensation

Friday, January 16, 2009 4:04 PM - By Elie Mystal

pay freeze salary freeze pay cut law firm.jpgA solid ice salary freeze is on at Arent Fox:

As a result of this comprehensive review, the Executive Committee (the “EC”) decided that based on global economic conditions, the Firm will freeze associate base compensation at the current 2008 rates for 2009.

But that’s not all:

Additional adjustments to the associate compensation system, also discussed below, include a somewhat more stringent 150-hour cap on non-billable creditable hours that can be increased only in limited circumstances, the reintroduction of a limited deferred compensation (“hold-back”) system, and modifications in the manner that hours are calculated for the purposes of qualification for productivity bonuses.

And if you’re concerned about bonuses:

The Firm will continue to make lump-sum bonus payments for above standard hours. Eligible associates who, during the evaluation year (or such later 12-month period as may be selected by the Firm), record more than 2050 billable hours, 2150 billable hours, 2250 billable hours, or more than 2350 billable hours will be eligible to receive productivity bonuses as follows.

So if you do bill 1950, you’re not getting any bonus at all. In fact at 2050 juniors are only getting $5K (considerably less than what juniors are getting at Cravath). Even 2250 hours doesn’t guarantee you a full Half-Skadden bonus.

No matter how annoyed you are at your firm’s pay structure, there always seems to be at least one other firm willing to pay a little bit less.

And that’s not even the interesting part. More on that after the jump.

law firm associate bonus watch 2008 biglaw bonuses.jpgAs far as I remember, Arent Fox is the first firm to directly address 2010 raises:

The Firm is hopeful that it will reinstate the normative raise system as the primary salary adjustment vehicle in 2010. To be eligible for any normative raise that is made in 2010, associates must (1) meet the Firm’s hours standard as defined above for the 2008-2009 evaluation year and (2) perform work at least at the level of quality expected for such associate’s level of seniority, as determined by the Department Managers, the AEC, and the EC. Associates who do not meet the Firm’s hours standard for the 2008-2009 evaluation year will receive either a reduced normative raise (assuming normative raises are awarded) or no normative raise for 2010, as determined by the AEC in its discretion.

But the firm doesn’t address the big question that has been percolating around ATL’s headquarters in recent weeks. Assuming things are back to “normal” in 2010, will firms be raising people up one class year or two?

Because if it’s not two years, then firms really aren’t freezing salaries at all, they are cutting salaries. A new Arent Fox 3rd year is getting paid like a 2nd year at peer firms. In 2010, when the Arent Fox associate is a 4th year, will he or she receive what a 3rd year at peer firms get? Or will that associate be brought all the way back up to market level?

Based on the extensive memo below, it’s an open question.

But don’t despair Arent Fox associates. At least you aren’t getting stabbed.

New Indictment Says Arent Fox Partner Conspired to Conceal Nature of Lawyer’s Death [ABA Journal]

Earlier: Prior ATL coverage of salary freezes
Prior ATL coverage of associate bonuses

ARENT FOX — MEMO — COMPENSATION AND BONUSES

During the past several weeks, the Firm has undertaken its annual extensive examination of its associate compensation system, including a salary review for market competitiveness, the normative raise structure, and other components of our system.

As a result of this comprehensive review, the Executive Committee (the “EC”) decided that based on global economic conditions, the Firm will freeze associate base compensation at the current 2008 rates for 2009. The Firm intends to continue to award its traditional compensation components of merit recognition for superior quality, productivity bonuses for hours that exceed the Firm’s hours standard, and cash bonuses for special significant contributions to the Firm (typically business generation-related), as described in more detail below. Additional adjustments to the associate compensation system, also discussed below, include a somewhat more stringent 150-hour cap on non-billable creditable hours that can be increased only in limited circumstances, the reintroduction of a limited deferred compensation (“hold-back”) system, and modifications in the manner that hours are calculated for the purposes of qualification for productivity bonuses.

We will continue to periodically review our compensation system and consider potential changes to it in an effort to assist us in continuing to attract and retain the best and brightest associates at all levels and at the same time deal with a very difficult economy.

HOURS STANDARD

The Firm’s hours standard for the September 1, 2008 to August 31, 2009 evaluation period is 1950 hours, of which at least 1800 hours must be billed to paying clients, i.e., clients who have engaged the Firm on a pay-for-services basis. The remaining 150 hours of the Firm’s hours standard can be achieved through a combination of approved pro bono, Firm representation, or strategic planning hours. Hours in excess of 150 for pro bono and strategic planning work will not be credited towards the 1950 hours standard - i.e., the former “waiver” system to obtain credit for pro bono and strategic planning hours in excess of 150 is eliminated - with the exception of members of the Firm’s Pro Bono Committee, who will be allowed up to 300 hours of pro bono/strategic planning time towards the 1950 hours standard. In addition, hours in excess of 150 for Firm representation time will be credited towards the 1950 hours standard at the discretion of the Managing Partner.

In determining whether the Firm’s hours standard of 1950 is met, the Associate Evaluation Committee (“AEC”) will continue its practice of “annualizing” hours for certain groups of associates as follows:

1. For an associate who commenced employment during the evaluation year, the AEC will not consider the calendar month in which the associate began work and will annualize the associate’s hours over the remaining calendar months during the evaluation period.

2. For a part-time associate, the AEC will annualize hours as if the associate were working a full-time schedule.

3. For an associate on a leave of absence in excess of ten business days (not including vacation, holidays, or normal sick time), which leave of absence has been approved by a Department Manager, the AEC will annualize the associate’s hours by not considering the time spent on such leave and annualizing the hours over the time spent actively working.

NORMATIVE RAISE

As noted above, the EC has decided that associates’ salaries will remain at the same level as was in effect for 2008 and, therefore, associates will not receive a normative raise in 2009. Despite the absence of a normative raise for 2009, each associate will advance in class year towards consideration for promotion to partnership.

The Firm is hopeful that it will reinstate the normative raise system as the primary salary adjustment vehicle in 2010. To be eligible for any normative raise that is made in 2010, associates must (1) meet the Firm’s hours standard as defined above for the 2008-2009 evaluation year and (2) perform work at least at the level of quality expected for such associate’s level of seniority, as determined by the Department Managers, the AEC, and the EC. Associates who do not meet the Firm’s hours standard for the 2008-2009 evaluation year will receive either a reduced normative raise (assuming normative raises are awarded) or no normative raise for 2010, as determined by the AEC in its discretion.

DEFERRED COMPENSATION

The Firm has reinstated the deferral component of the compensation system for those associates who did not meet the hours standard for the 2007-2008 evaluation period. Associates subject to the deferred compensation system will have $10,000 of their 2009 base salary deferred. All first-year associates (Class of 2017), as well as second-year associates (Class of 2016) who did not meet the Firm’s hours standard, will be subject to a $5,000 deferral of their 2009 base salary. In order to be eligible to receive payment of the deferred portion of his/her salary in December 2009, an associate must (1) be performing work at least at the level of quality expected for such associate’s level of seniority, as determined by the Department Managers, the AEC, and the EC; (2) meet the Firm’s hours standard, as defined earlier, for the 2008-2009 evaluation period; and (3) be employed by the Firm at the time the deferred compensation is paid. Deferred compensation will be paid to eligible associates on or before December 31, 2009.

All lateral associates who joined the Firm after September 30, 2008 will be exempt from the deferral component of the compensation system during 2009.

Associates who are exempt this year from the deferral component of the compensation system are expected to meet the Firm’s 1950 hours standard as defined above. Thus, if an associate who is exempt from the deferral component of the compensation system this year does not meet the Firm’s hours standard for the 2008-2009 evaluation period, the deferral component of the compensation system will be applicable to the associate effective January 1, 2010, assuming the deferral portion of the compensation system is indeed continued by the Firm in 2010.

PRODUCTIVITY BONUSES

The Firm will continue to make lump-sum bonus payments for above standard hours. Eligible associates who, during the evaluation year (or such later 12-month period as may be selected by the Firm), record more than 2050 billable hours, 2150 billable hours, 2250 billable hours, or more than 2350 billable hours will be eligible to receive productivity bonuses as follows:

Partnership Productivity Bonus Productivity Bonus

Class More than 2050 Billable Hours More than 2150 Billable Hours

2017 and 2016 $5,000 $10,000

2015 and 2014 7,500 15,000

2013-2010 7,500 15,000

Partnership Productivity Bonus Productivity Bonus

Class More than 2250 Billable Hours More than 2350 Billable Hours

2017 and 2016 $15,000 $20,000

2015 and 2014 22,500 30,000

2013-2010 25,000 32,500

Annualization will no longer be used for determining qualification for productivity bonuses except for part-time status. Productivity bonuses for part-time associates will be pro-rated.

Additionally, only up to a maximum of 150 approved pro bono or strategic planning hours can be credited towards qualification for a productivity bonus. Consistent with the discussion above regarding the Firm’s hours standard, the former “waiver” system for pro bono and strategic planning hours in excess of 150 is eliminated for purposes of determining eligibility for productivity bonuses. Firm representation hours in excess of 150 hours will be credited towards productivity bonus eligibility at the discretion of the Managing Partner.

In addition to meeting the hours goals referenced above, to be eligible for a productivity bonus, the associate must (1) be performing work at least at the level of quality expected for such associate’s level of seniority, as determined by the Department Managers, the AEC, and the EC, and (2) be employed by the Firm at the time the bonuses are paid.

CASH BONUSES

In addition to productivity bonuses, the Firm will also award discretionary lump-sum cash bonuses to eligible associates who have been identified by the AEC, the Department Managers, and the EC, in their discretion, to have made special significant contributions to the Firm, based on traditional factors such as (1) billable hours, (2) business generation and expansion, (3) Firm citizenship, and (4) other business-related factors.

MERIT RECOGNITION

The Firm will continue its practice of recognizing associates who meet the Firm’s hours standard, as defined earlier in this memorandum, and are performing work of superior quality, as determined in the discretion of the Department Managers, the AEC, and the EC. The nature and form of this recognition will be determined later in the year. The Firm will continue its policy that no more than a certain limited percentage of associates (as determined by the EC) who are reviewed may receive such recognition.

Since the merit recognition is awarded at the end of the evaluation period based upon performance during the evaluation period, any form of payment made to reflect such recognition will be pro-rated in the case of associates who are part-time.

* * * * *

As you know, associate compensation is an ever-changing issue. We will continue to review our associate compensation program in an effort to respond to market conditions and to keep it competitive with comparable law firms and therefore reserve the right to modify it again at any time in our discretion.

On behalf of the EC, I would like to thank all of you for your contributions to Arent Fox. We especially appreciate your patience and understanding with respect to the compensation changes outlined above as we work together to ensure the Firm’s success through the most challenging economic climate ever confronted by the legal industry.

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Posted in: Arent Fox, Associate Bonus Watch 2008, Salary Freeze

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