Published in Law 360, March 23, 2012
by, Django Gold
While last spring brought news of extra bonuses at several top U.S. law firms, 2012 has been less promising for BigLaw associates who have yet to — and may not — receive spring payouts due to what legal industry experts call a buyer's market for low-level talent.
With firm revenues growing at a snail's pace — a recent BTI Consulting Group report pegged law firms' compound annual growth rate at 1.6 percent since the recession, compared with 10.8 percent between 2002 and 2008 — the legal industry has by necessity tightened its belt across the board, which has led firms to cut costs wherever they can, often at the expense of their associates.
"Firms are very conscious that we're still in a tough economic environment, and they are as cost conscious today as they have ever been," said Jack Zaremski, founder and president of placement and consulting firm Hanover Legal Personnel Services Inc. "Generally speaking, firms are not going to be spending money that they think is discretionary, and spring bonuses definitely fall into that category."
Traditionally, spring bonuses, coming just months after law firms give out their traditional year-end bonuses, have been viewed as a means of giving extra pay in order to retain and attract associate-level talent that might otherwise fly the coop once holiday checks clear.
"The idea is that you have to reward the talent for the contributions they're making," said Edward Poll, principal of legal consultancy LawBiz Management Co. "If you don't, they have to look elsewhere. In yesterday's world, associates didn't move around very much, because there weren't very many options. In today's world, it's loosening up a little bit."
However, this mobility has been severely undercut by a legal industry brimming with out-of-work associates that heavily favors employers. And with a new crop of hungry law school graduates coming up every year, it's a buyer's market that makes such perks as spring bonuses strictly optional.
Because of this, even those firms that have the spare cash needed for spring bonuses aren't going to give it out if the job market doesn't require it, Zaremski said.
"It's not a question of how well the firms are doing; it's a question of if the firms need to be giving out the bonuses, which they don't," he said. "It's Business 101. It's very simple. No business spends money if they don't have to."
Of course, one wrinkle to be considered is last year's spring bonus season, in which dozens of law firms doled out extra payouts on an unprecedented level, prompting many associates and legal industry observers alike to expect a similar move this year from top-tier firms.
The 2011 bonuses, prompted in part by heavier associate workloads as the market for legal services began to improve in the wake of the recession, were largely designed to keep associates from jumping ship to firms that could offer more competitive benefits.
Sullivan & Cromwell LLP led the pack with payouts of between $2,500 and $20,000 per associate, according to an internal memo published on blog Above The Law. Industry peers Cravath Swaine & Moore LLP and others soon followed suit.
But the possibility of this industry-wide trend repeating itself this year seems unlikely. Sullivan & Cromwell said in December that it was planning another spring payout, according to a memo published at the time on Above the Law, but no reports have surfaced since, and neither Sullivan & Cromwell nor Cravath was immediately available for comment on Friday.
"I think that to some degree there's a herd mentality," Poll said. "So if Sullivan & Cromwell is going to do it, but they're not doing it yet, other firms might be holding their breath and hoping that nobody does."
Poll added that he believed some firms would eventually come around to announcing the bonuses.
While some legal industry watchers say springtime bonuses will eventually be awarded, not everyone is in tune with the wisdom of doing so. Jerome Kowalski, founder of legal consulting firm Kowalski & Associates, said that paying out such benefits is not a good investment for law firms.
"The usual group of suspects will do it," he said. "For those firms, they have some positive impact in terms of recruiting out of law schools and laterally, but that reward is not worth the price that law firms pay for it."
"Spring bonuses are very illusory," Kowalski said. "Instead of giving people spring bonuses, one way to improve associate retention and morale is to just give them a raise. Instead of a $7,500 bonus, raise their annual base compensation, so next year they don't have to be waiting with their tongue hanging out for the next bonus, hoping it comes."
Some firms are still likely to pass out the early-year bonuses, but it is no longer necessary in the current job market, Zaremski said.
"I don't think Sullivan & Cromwell and Cravath are scared of losing their associates to competitors in the current market," he said. "We'll see whether they award these bonuses, but I would expect far fewer firms to follow suit this year. Last year was basically an exception to the rule."
Nonetheless, high-quality associates, especially those with a book of business that helps contribute to their employers' bottom line, will find themselves rewarded, regardless of whether the reward comes in the form of a bonus, Poll said.
"There are not a lot of good people out there, associate-wise," he said. "So star associates who are making continued contributions in terms of the quality and quantity of their work, especially rainmakers, will be retained and they'll be paid. Whether they see it in terms of base salary or as a bonus, at the end of the day, it doesn't really matter."
--Additional reporting by Carolina Bolado and Erin Fuchs. Editing by Jocelyn Allison and Cara Salvatore.