Cravath, Swaine & Moore announced reduced end-of-year associate bonuses late Thursday in a memo to its staff. The numbers are down sharply from last year. The bonuses start at a pro-rated $17,500 for first-year associates and rise to $30,000 for seventh- and eighth-years. This is roughly half of the base bonuses the firm paid the last two years. In addition, the firm and a handful of others in New York paid one-time boom-year bonuses in 2007. There won't be any at Cravath this year. (The Web site Above the Law published the Cravath memo first.)
In an interview with the Am Law Daily, Evan Chesler, Cravath's presiding partner, said the "principal driver is what's happening to our clients. Every day we're seeing them laying off people. Our conclusion was we needed to be as sensitive as we could be."
The bonus announcement memo also included the first indication of Cravath's financial results for 2008. "As a result of the deterioration of the business environment, the Firm's financial performance in 2008 will not be in line" with 2006 and 2007. Chesler refused to say how far off Cravath would be this year, saying that he couldn't tell what collections from clients would yield in the fourth quarter. One thing he did know: "There ain't no surplus."
While the final numbers remain to be computed, a drop at Cravath is consistent with reports from Citi Private Bank, which said in October that profits were off for the most lucrative firms that the bank surveys. For the first six months of 2008 profits were down by nearly 12 percent. In the most recent Am Law 100, the survey of top grossing firms in the nation, Cravath's profits per partner were second at $3.3 million in 2007 on a gross revenue of $610 million. Cravath had 90 equity partners in 2007. Privately, many heads of New York firms have been predicting profit drops between 10 percent and 20 percent. Most expect sharper drops at firms that had previously concentrated on securitizations and exotic financial instruments.
Last week, Skadden, Arps, Slate, Meagher & Flom announced that it would pay the same base bonuses as 2007. In its memo Skadden also reported that its economic results "are not as strong" as in 2007.
The Cravath and Skadden announcements will set the benchmarks for New York firms. The hard times may also give some firms cover to break their habit of paying lockstep bonuses by seniority to their associates.
Cravath stands to save millions by its decision. "Yeah, we're obviously saving money as an institution," Chesler said. "But the big driver here is what is the right thing to do in this economy. ... I've got two things to focus on, the firm's relationship with clients and compensating our people fairly."
The former, at least, seem pleased. "I've got to tell you, and I don't want to name any names, but I have gotten calls from a half dozen clients this morning thanking me," Chesler said Friday. Clients hadn't told him before to cut back on the bonuses, "but they made their views clear since."
With additional reporting by Nate Raymond.
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.