Law Firms Consider Overhaul of Associate Bonus Structures
Gina PassarellaThe Legal Intelligencer
December 04, 2008
The end of the economic boom days for law firms, although most likely temporary, might also mean a shift in the way associate bonuses are structured as firms use the downturn as a reason to overhaul associate compensation packages.
Leaders at several Pennsylvania firms have said their bonus structures aren't changing this year, though some expect the amounts doled out to be less. They cautioned, however, that the economic climate may cause firms to at least more closely examine their models for next year.
Aside from perhaps lease costs, associate compensation is one expense that has seemed hard for firms to control. This year, more than ever, clients aren't going to put up with rate increases, which means firms will have to eat the costs of compensation packages. That might have been easy to do two years ago, but with revenues and profits projected to be flat or down for 2008, associate compensation will all the more visibly take away from the bottom line.
One local firm leader said firms have done very well at reducing staff costs through technology and greater attorney efficiency. That has resulted in a clear decrease in the percentage of expenses related to staffing, he said.
"At the same time, that has been more than eaten up by associate compensation costs," he said. "The percentage of our total revenue that has had to be devoted to recruiting and retaining talent, primarily in the associate area, is eating into firm margins."
Tension arises when those costs equate to rate increases. Clients have already started pushing back on the use of junior associates at high rates. The firm leader said he already received his annual letter from a large corporate client reminding firms the company won't tolerate rate increases without a value add.
Firms are under a lot of pressure to maintain their profit margins but, if that can't be done through rate increases, it has to come from somewhere, he said.
That means firms have to find ways to be even more efficient, and it would most likely come from either a change in the compensation structure or how fee arrangements are structured, he said.
Another Pennsylvania firm leader said most large firms, particularly those with a lockstep compensation model, will use the economy as a reason to "really re-examine associate compensation generally, including the bonus model."
The firm leader said, however, that while this re-examination takes place each economic downturn, there aren't many alternatives to the current structure used by most large firms. He said firms will most likely continue to move in the direction of merit-based pay and that could mean a larger focus on bonuses.
For firms with formulaic bonus structures based on billable hour targets, it really is just a numbers game. If associates hit their targets, the bonuses are paid -- as long as firms maintain their typical structure outlined at the start of each year. If hours are down, the firm keeps the cash. Firms without those discretionary or "special" bonuses are breathing a sigh of relief.
Fox Rothschild doesn't have to worry about bonuses until after its fiscal year ends next March, but administrative partner Mark Silow said billable hours are on target and he doesn't expect bonuses to be much different from where they were last year.
"Our bonus system is very formulaic and we have every intention of honoring it," he said.
There are no discretionary bonuses. Fox Rothschild gives out bonuses for meeting billable hour requirements and for fee origination. It also has a retention bonus given to associates after their third and fifth years.
Silow said he would think his firm doesn't have to deal with the morale issues firms with discretionary bonuses might face when the numbers aren't what associates might expect this year. The firm did away with discretionary bonuses about three or four years ago, and Silow said the current system is a better use of the firm's dollars. Associates know what to expect and the firm eliminated issues regarding paying someone a discretionary bonus who may not have deserved it or vice-versa, he said.
Jean Durling, the firm's chief recruitment and professional development officer, said Fox Rothschild doesn't have a lock-step payment system. Even though it might not have discretionary bonuses, she said the system allows for other avenues of merit-based pay.
Drinker Biddle & Reath executive partner Andrew C. Kassner said his firm is meeting this month to discuss bonus and compensation packages that will be paid out after the firm's fiscal year ends Jan. 31. The firm hasn't decided to change its program, but as it does every year, it will look at the market and the firm's needs, he said.
Drinker Biddle has both discretionary and billable-hour based bonuses. Kassner said he thinks associates have a clear idea of the requirements for each.
He said firms re-examine their compensation systems along with changes in the economy. When times are good, firms want to make sure they are offering competitive packages. When times are tough, they feel the need to revisit those plans, he said.
"So I would assume the law firm industry as a whole is going to take a look" at their compensation structures, Kassner said.
K&L Gates managing partner Peter Kalis said his firm always determines associate bonus pay after the first of the year.
"One of the reasons we do that is to see how the year ends, frankly, and that affects the funding of the bonuses," he said.
Kalis said he wouldn't be surprised if, across the country, bonuses were "more subdued" than they have been.
Buchanan Ingersoll & Rooney has traditionally decided its bonus packages in January, after the end of its fiscal year. Chief Executive Officer Thomas L. VanKirk said bonuses will continue to be paid out under the same criteria.
The firm has productivity requirements that are based on billable hours and firm reviews. Firm profitability also plays a factor. There is no predetermined pool from which the firm draws its bonuses.
If the firm's numbers are "way off mark" for the year, than it reserves the right to reduce bonuses based on that fact, VanKirk said. While Buchanan Ingersoll's numbers may be flat for the year, he said he doesn't expect profitability to be a factor in associate compensation. The firm's numbers would have to be down considerably for that to happen, he said.
The only area in which the economy might affect bonuses is for attorneys in those practices that were hit harder than others, causing billable hours to be down, VanKirk said.
According to reports on the legal blog Above the Law, Morgan Lewis & Bockius has decided to delay making bonus decisions by a month. The firm's fiscal year ends Sept. 31 and it has said that the move from December to January was not based on the economy, but more on logistics over trying to do reviews in a hectic end-of-year month.
As firms decide how they will dole out the dough, associates seem to be falling into two camps, recruiter Steven Kruza of Kruza Legal Search said.
With the economy being what it is, some associates expect to see smaller bonuses while others feel they put in their time and expect to be paid, he said.
"The general feeling out there is maybe a little bit more of a focus on job security ... but then again a lot of these people are working hard and those who billed a lot of hours will expect to be rewarded for it," Kruza said.
On the whole, most associates are gearing up for smaller bonuses. That is particularly so for attorneys in practices that have slowed down considerably, he said.
The slow down in practices has really changed the perspective of many attorneys, Kruza said. Not billing hours becomes the concern and the focus on bonuses subsides.
"Anybody who's realistic and tapped into what's going on out there wouldn't think this is going to be a huge bonus season," he said.