Could we be looking at that rara avis, a genuinely suspenseful and surprising Biglaw bonus season?
We haven’t had one for a while. In the past few years, things have followed the usual pattern: the market leader, Cravath, announces bonuses, and everyone else follows.
The last truly interesting bonus season took place in 2008. That year, instead of waiting for Cravath, Skadden moved first and offered generous bonuses (regular year-end bonuses at 2007 levels, just no “special” or supplemental bonuses). The following day, Cravath announced bonuses that were essentially half of Skadden’s. This led my colleague, Elie Mystal, to develop and deploy the term “Half-Skadden” to refer to the bonuses offered by Cravath and its (many grateful) followers.
But this year raises an interesting question: Could Cravath get… Cravathed? Could this be the year of “Half-Cravath” bonuses?
UPDATE (11:00 AM): Or maybe not. Note the update at the end of this post about one leading firm that just matched Cravath.
A few weeks ago, before announcement of the Cravath bonuses, I offered Cravath some friendly advice: “If Cravath is having a good year, it might as well pay big bonuses, and force its rivals to cough up the cash (regardless of whether they’re having good years too).”
And that seems to be exactly what Cravath did. On Monday, it announced generous bonuses, to general acclaim from associates at both Cravath and rival firms.
With Monday’s announcement that its associates will get fatter year-end bonuses in 2012 than they did in 2011, Cravath, Swaine & Moore cut through some of the gloom that has clouded the financial outlook for large law firms of late. The question now is whether Cravath’s peers will mimic it in doling out extra compensation as they have in the past — or pull back in light of the modest revenue growth most industry experts are expecting this year.
As of Tuesday, few were rushing to follow suit.
Indeed, The Am Law Daily’s calls for comment on year-end bonuses to a dozen Am Law 100 firms — Davis, Polk & Wardwell; Kaye Scholer; Kirkland & Ellis; Milbank, Tweed, Hadley & McCloy; Paul, Weiss, Rifkind, Wharton & Garrison; Proskauer Rose; Ropes & Gray; Shearman & Sterling; Simpson, Thacher & Bartlett; Skadden, Arps, Slate, Meagher & Flom; Sullivan & Cromwell; and Weil, Gotshal & Manges — went unreturned, yielded a “no comment,” or elicited a response that it was premature to discuss the subject.
Now, let’s not get ahead of ourselves. There’s still a very, very high likelihood that some or all of the big New York lockstep firms will match the 2012 Cravath bonus scale. Why? Because the reputational consequences of not matching are simply too grave, as previously discussed by Anonymous Partner:
Most partners just want their firm’s reputation in the marketplace to be stable or improving. Because associate bonuses get so much press, and have become a metric for assessing the financial strength of firms, they have a marketing budget component to them. What partners want is good or no press on this issue.
Firms need to look good to prospective lateral partners with business. No public signs of weakness allowed.
That said, a lot of the top Am Law 100 firms — top in terms of reputation and profitability, that is — don’t do much lateral partner hiring. And they’ll still get flooded with great résumés for associate positions too. So it’s not a foregone conclusion that they’ll match Cravath; the air gets pretty thin up there.
We’ve already seen one potential sign of weakness, namely, Weil Gotshal postponing payments until January 31, 2013. In light of the time value of money, the desire of some associates to leave their firms as soon as their bonus checks clear, and the possible tax consequences for high-earning associates, Weil’s move could be viewed as a “failure to match.”
Why might some of Cravath’s “peer firms” not want to match the CSM bonus scale? Am Law explains:
A senior partner at one Am Law 100 firm who declined to comment on whether associates there can count on receiving Cravath-level bonuses described the standard-setting firm’s 2012 scale as “a big bump.” One possible reason for this partner’s curt response: matching Cravath on associate bonuses can get pricey for its rivals given that their associate class sizes are typically larger and their partner tracks are generally longer.
Exactly. Cravath is huge in terms of prestige and profitability — #5 in profits per partner in the latest Am Law rankings, with PPP of $3.1 million — but not in terms of size. As you can see in the firm’s Career Center profile, Cravath has about 500 lawyers in its two offices (New York and London, but mostly New York). Compare that headcount to a firm like Weil, which has more than 1,200 lawyers spread out over 21 offices. Matching Cravath can get very pricey for firms that are two or three times the size.
And then there’s the issue of firm performance. According to Am Law, Cravath’s associates are on track to rack up 10 percent more billable hours this year compared to last year, thanks to all the work the firm has:
The increased workload is a product of major assignments the firm has taken on in both the transaction and litigation arenas. On the litigation front, for instance, the firm is serving as national coordinating counsel in federal and state residential mortgage-backed securities litigation for JPMorgan Chase, while also representing Credit Suisse in separate litigation stemming from the credit crisis.
On the transactional side, Cravath has advised Kraft Foods Group, Inc.’s North American grocery business in an August spin-off valued at $26 billion; Grupo Modelo SAB de CV in connection with its $20 billion sale of a 49.7 percent stake to Anheuser-Busch InBev NV in June; and Pentair, Inc., on its $10 billion merger with Tyco International Ltd. in March.
So why is Cravath paying such nice bonuses? Well, because it can:
Cravath’s bonus announcement may come as a bit of a shock to many law firm leaders at a time when Wells Fargo and other industry watchers are predicting anemic revenue growth. But the firm’s move underscores another trend: that the most profitable firms are pulling away from the pack.
Indeed. And those in the pack who try to keep up with Cravath when they really can’t will ultimately just find themselves falling farther behind, as high associate compensation costs eat into their profits per partner. It’s a vicious cycle.
Since Cravath seemed to like my advice, I’ll offer some words of wisdom to other firms as well. And here they are: don’t try to match Cravath if it will cause you too much pain.
First, it’s not necessarily going to get you better talent. Young lawyers today, even at elite law schools, are hungry for jobs. If you are a firm with a great reputation and great work, paying less than Cravath by a few thousand per class year isn’t going to have a material effect on your recruiting. (And even if you match Cravath, the true prestige whores will still go to Cravath anyway.)
Second, sometimes the cure is worse than the disease. If you try to match Cravath when financially you just can’t, it will hurt your profitability, which will hurt your reputation — the very thing motivating your misguided match of Cravath. And who knows, you might even have to resort to layoffs down the road — which will really hurt your reputation, far more than low-ball bonuses.
So if you have to pay “Half-Cravath” bonuses this year, so be it. There are worse things in the world than being an also-ran to Cravath.
UPDATE (12:00 PM): Here’s our story about the Simpson Thacher bonus match.
Earlier: Breaking: Cravath Announces Year-End Bonuses; Let the 2012 Bonus Season Begin!
New Partner Watch: Does Cravath’s Bumper Crop Bode Well for Biglaw Bonuses?
If Partners Really Have Souls, Bonuses Will Be Early This Year
Breaking: Cravath Bonuses Are Out; Welcome to the 2011 Bonus Season!
Cravath Bonuses Are Out: The 2010 Bonus Season Is Under Way!
Breaking: Cravath Bonuses Are Out and Down (2009)
Associate Bonus Watch (2008): Cravath Offers Less Than Skadden
Cravath Announces Bonuses — ‘Special’ and Otherwise!!!