Continuing with our rundown of the top ten Biglaw stories of 2008, we reach our fourth place story on the business end of things: the dramatic reduction of associate bonuses.
Bonus news is always a big deal around these parts, and based on the way that the 2008 bonus season started, it looked like there might be a fight for control of the New York market. Skadden led off with bonuses that matched 2006 levels (or 2007 levels, minus the “special bonus” portion). At the time, Skadden wasn’t sure they’d be at the top of the market. Skadden’s bonus memo included the following language:
The Firm has historically paid its associates at the “top of the market” in their respective local markets. While we do not know what other firms will do this year with regard to paying a supplemental bonus, we believe that our bonuses this year should be limited to the year-end discretionary bonus. What we will do in the future years, will, of course, depend on business conditions at the time and competitive compensation.
There were more than a few people who thought other firms might come in above Skadden. That didn’t happen. Instead, Cravath happened.
Half-Skadden sets the market, after the jump.
It is still kind of shocking that Cravath announced reduced bonuses just one day after Skadden came out with its bonus scheme. You really have to go back and look at the Cravath bonus memo to get the full sense of how surprising the decision was:
As a result of the deterioration of the business environment, the Firm’s financial performance in 2008 will not be in line with those earlier years. While the Firm believes that we should pay year-end bonuses this year, in light of the current business climate we do not think it is appropriate to pay the full bonuses that were paid in 2006 and 2007 or the additional supplemental bonuses paid in 2007….
Given the uncertainty of the economy and the business climate going forward, we will not be able to address the issue of whether there will be any year-end bonuses in 2009 until this time next year. However, associates should be prepared for the likelihood that the economy and the Firm’s financial performance next year will not show a significant improvement over this year and they may receive significantly reduced or no year-end bonuses next year.
In one day, Cravath turned the market on its head. And there was no going back. Under the cover of Cravath, firm after firm after firm went with Cravath’s lower bonus scale, ceding “top of the market” status to Skadden.
And quickly all of the normal indicators about a firm’s financial health went out the window when it came to associate bonuses. High profile bailout work? Match Cravath. Incredibly busy bankruptcy department? Match Cravath. Paying your associates in L.A. at Skadden levels? Match Cravath in New York.
So why is the bonus situation only our fourth-place Biglaw business story? Because Cravath wasn’t the only thing out there giving every firm cover for cutting associate bonuses. Sitting in the middle of “the worst economic crisis since the Great Depression,” there were lots of other things firms needed to do to bring their costs under control. In this market, a “half-Skadden” bonus is a lot better than some of the other pains that were passed around the Biglaw community.