Associate Bonus Watch 2011, Biglaw, Bonuses, Citigroup, Money, Partner Issues

Biglaw Starts To Manage Expectations About Bonuses

The first bit of bonus news has leaked out of Biglaw. We're not talking about spring bonuses, and we're not talking about random mid-year bonuses. We're talking about regular, end-of-the-year, take-it-to-the-champagne-room bonuses. And sure, the early news is bad, but that's to be expected. This first report is just what Biglaw wants you to hear. But if the past year in bonus news proves anything, it's that Cravath sets the bonus market, even when they do it late....

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Drums please:

Bonus, bonus, bonus time. Time to sit back and unwind.

The first bit of bonus news has leaked out of Biglaw. We’re not talking about spring bonuses, and we’re not talking about random mid-year bonuses. We’re talking about regular, end-of-the-year, take-it-to-the-champagne-room bonuses.

And sure, the early news is bad, but that’s to be expected. This first report is just what Biglaw wants you to hear.

But if the past year in bonus news proves anything, it’s that Cravath sets the bonus market, even when they do it late….

The mid-year report from the Citi Private Bank group makes things look pretty grim for Biglaw firms. Here’s a summary from Am Law:

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For the first half of 2011, revenue was up 3.7 percent across the industry. The increase was driven by strong inventory levels coming into 2011, increased rates, a 1.8 percent growth in demand and likely improvement in realization. These results are based on a sample of 178 firms—80 Am Law 100 firms, 54 Second Hundred firms, and 44 other firms.

Rate increases and realization stood out as positive signs during the first half. In 2009 and 2010, we saw rate increases that were less than half of those in 2001-2007. In the first six months of this year, we’ve seen that trend begin to reverse. We also asked managing partners, mostly of Am Law 50 firms (the nation’s 50 highest-grossing firms), how realization at midyear compared with last year, and they said it had stabilized, if not improved. These two findings suggest that we could be seeing an easing of the pricing pressure of the last two years.

Countering the positive impact of the uptick in revenue, rates, and demand is growth in expenses—at a 4.7 percent increase, expenses grew more than revenue, squeezing profit margins. Reasons for those expense increases varied. Some firms increased their operating expenses because they commenced long-overdue infrastructure projects. Many saw a notable increase in compensation expenses, due to spring bonuses.

Okay, Citi, okay. You have carried the water well for your Biglaw clients, now go run along and get your cookie.

Really, you have to admire the attempt to turn a 3.7% revenue uptick as a bad thing. But you see the red herring here: spring bonuses.

Let’s try to hold a thought in our head for more than 18 seconds and remember where spring bonuses came from. At the end of 2010, Cravath announced bonuses that some viewed as lowballing the market. Cravath announced a 2010 bonus structure that was the same as the 2009 bonus structure, even though everybody knew that Biglaw firms did much better in 2010 than in 2009.

Most of the market was all too happy to follow the Cravath scale. But after a while, Sullivan & Cromwell essentially said screw this noise, and made an additional payment to associates for their 2010 performance — the S&C spring bonuses. Then Cravath topped the S&C scale, and the spring bonus race was on.

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The point of that history lesson was to highlight that while spring bonuses were paid out in 2011, they were effectively done out of, and based on, profits and performance in 2010. They were only necessary because Biglaw firms undercut their associate expenses in 2010.

While it’s technically true that spring bonuses are a 2011 “expense” for firms, it’s arguably disingenuous for firms to count that money against the 2011 bonus pool.

And look, to be fair, spring bonuses may have been a completely ludicrous idea. It might have been incredibly stupid for firms that don’t make as much money as Cravath to try to pay as much money as Cravath. For God’s sake, Sullivan & Cromwell never went back to match Cravath on the spring bonus front, but a bunch of other firms did.

And they will again.

So what’s going to happen? Who knows. No it’s not just that I don’t know, it’s that the firms that are weeks away from committing millions of bonus dollars to their associates have no freaking clue how much it’ll cost them. Because Cravath hasn’t told them yet. Cravath hasn’t told them what to do, and 50 or 60 other huge Biglaw firms are just kind of waiting around to see how much running their business actually costs.

Hell of an industry, isn’t it? Stay tuned to Above the Law as we gear up for another Biglaw bonus season.

Citi’s Midyear Report: Firms’ Expenses Outpace Revenue Gains [Am Law Daily]

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