The Bonus as Endangered Species
As executives of the country's leading financial institutions can attest, few words arouse greater passions even today, two years after the financial bailout (that is, temporary rescue) than "bonus."
CEO pay at large companies used to be 10 to 15 times that of the lowest worker; in recent years, with bonus compensation paid in the tens of millions of dollars, the gap grew to be astronomical. That became a major target of ire when these companies needed help, and ones that have recovered, like Goldman Sachs, are still reticent and defensive about what their executives are paid when they qualify for bonuses.
The biggest law firms have these financial institutions as clients. The end of the calendar year used to be a joyous time at these firms – because it was bonus time for them, too, including for the associates who made possible the leverage that supported $1,000 an hour billing rates.
Well, times have changed for Big Law, too, according to The Wall Street Journal. The newspaper reported late last year (see article) that many firms are paying flat or lower bonuses due to a combination of facts indicating that bonuses may become a permanently endangered species:
Corporate work has not yet returned to the peaks of 2007, when year-end bonuses were much higher at many firms. And litigation is still sluggish, as clients reduce the number of lawsuits and prod their lawyers to settle in order to hold costs down. The average hours billed by associates at the nation's top 50 law firms by revenue rose 7% in 2010, according to a Citibank survey. However, this is almost balanced out by the fact that the same survey showed the number of associates at the top 50 firms fell 6.7% As one legal recruiter summed things up, "The work that used to be done by 10 associates is now being done by six."
Associates contribute to revenue, but they are also part of a law firm's overhead. Every associate at every firm adds to overhead expense. Associates only provide value to the firm if they enhance the firm's profitability through leverage. Leverage is only effective when associates are profitable for the firm to keep using them. The economics of hiring new law school graduates can no longer be taken for granted, given the time and expense of the process required to get them up to law practice competence.
What should firms expect from their young lawyers to justify keeping them? The fundamental question in this regard is obvious: is there enough work? When the answer is "no," two things have to give: the number of associates, and the amount the remaining lawyers and staff are paid. The laws of economics aren't in the statute books, but they nonetheless cannot be violated. |
