Editor's note: This is the first in a two-part series on law firm salaries and bonuses. The second part looks at similar issues in the market's largest firms.

By most accounts, associates at Pennsylvania's small and midsize firms enjoyed salaries and bonuses in 2007 that were either consistent with or higher than those of the year before. But as we head into an economically uncertain 2008, some associates may feel the effects of a downturn more than others depending on their firms' particular philosophies toward compensation.

For associates at firms that base the size of year-end bonuses and annual pay raises largely on the amount of billable hours each attorney logs, lukewarm business this year could translate into an equally tepid payoff in comparison with the last few years.

"Certainly, overall firm performance is a factor" in how much can be spent on associate pay raises and bonuses each year, said Mitchell S. Kaplan, managing partner of Philadelphia-based Zarwin Baum DeVito Kaplan Schaer Toddy.

According to Kaplan, the firm does not base its bonuses on individual associate performance. Rather, it favors rewarding jobs well done primarily through base pay raises.

"Some firms have a different philosophy; we like to give a majority of one's compensation in the salary as opposed to the bonus," he said, but was not able to provide base salary figures due to firm policy.

Kaplan also declined to disclose specific bonus amounts given out during the last few years but said they, generally, remained on a steady upward course between 2006 and 2007. He predicted 2008's bonus amounts would follow a similar trajectory but did admit that the gloomy financial forecast is enough to make anyone with business interests nervous.

"The financial climate seems to be setting up some red flags," he said. "We're all concerned, as any prudent business person should be."

Manny D. Pokotilow, managing partner of Caesar, Rivise, Bernstein, Cohen & Pokotilow in Philadelphia, also reported a general increase in the dollar amounts of raises and bonuses from 2006 to 2007, but would not disclose actual numbers.

He said that while bonuses account for a large portion of partners' incomes, they're only a small piece of associates' pay.

"Most of our compensation for associates is through salary," he said.

Pokotilow said the firm's overall revenue does have an effect on the amount of extra money it has been able to tack onto associates' base incomes each year, but maintained an optimistic outlook for 2008, predicting profits at least equal to those of 2007.

In fact, he said, he's no more or less nervous about the financial climate in 2008 than he is at the beginning of any other year.

"Every year looks uncertain," he said. "All I can tell you is I've never known a [firm leader] who was completely comfortable with anything less than everybody in the firm working overtime. Fortunately, we have an efficient enough staff that even with people not working overtime we will look forward to profit at the end of the year."

David M. Kleppinger, managing partner of Harrisburg, Pa., firm McNees Wallace & Nurick, is similarly confident in his firm's ability to weather the potential economic storm this year and still prosper.

"Fortunately, we've withstood these types of economic downturns before in 2001 and 2002, and we were able to exceed our budget," he said. "I'm confident in our ability to do that again this year, but, obviously, it will take a lot of effort."

That confidence is what allowed the firm to increase the dollar amount of associate bonuses to be handed out this year. The firm, which does not disclose dollar amounts to the press, pays a flat rate at the end of each calendar year to each associate who meets or exceeds 1,800 billable hours.

Kleppinger said that although that flat rate is reviewed and adjusted at the beginning of each year, it is, ultimately, governed by the firm's financial performance during that year.

So, while some firms are taking a conservative approach to finances in anticipation of a slow year, McNees Wallace is betting its 2008 income will be sufficient to support larger bonuses.

Kleppinger said he felt being a midsize firm in central Pennsylvania provides some natural defenses against recession.

"Our clientele is a midmarket clientele with broad diversification across all industry areas," he said. "It's unlikely that all of them would be down at the same time. Plus, we're at the seat of the state government, which generates a lot of work itself and is not usually affected by recession."

The firm also elected to upwardly adjust its entire associate pay scale, including starting salary, this year. Kleppinger said it's firm policy to review its salaries on a biannual basis and make changes according to the flow of the market. He said the firm, which paid its first-year associates $85,000 last year, tries to stay competitive with the megafirms' pay scales since they are both fishing in roughly the same talent pool. Still, he said, they try to do so on their own terms.

"We do not match [megafirms] dollar-for-dollar [in salaries] because of the difference of cost of living and quality of life that we try to promote versus what a much larger firm might offer," he said.

Dinsmore & Shohl, which has an office in Pittsburgh, hands out merit-based bonuses.

In contrast to McNees Wallace, Jason B. Sims, a partner in the firm who works in its Cincinnati office but is a member of the firmwide recruiting committee, said the amounts of the bonuses have nothing to do with how much business the firm brings in.

"We don't give bonuses that are based on the profitability of the firm," he said. "It's not tied to an economic formula -- it's tied to performance."

First-year base salaries, on the other hand, are affected by outside forces, he said.

"They're more a product of demand in the marketplace," he said, citing recent "upward pressure" caused by megafirms' skyrocketing first-year salaries. "We will always be competitive in our market so we can attract the best associates possible. If the market cools off, the upward pressure won't be there and you won't see increases in first-year associate salaries [at our firm]."

Sims said during the past few years, the firm's first-year base salaries have climbed at a steady rate of about 4 percent annually, but he's unsure of whether that upward trend will continue in the marketplace this year.

"From what I've read, it appears it may level off," he said.

Philadelphia personal injury firm Anapol, Schwartz, Weiss, Cohan, Feldman & Smalley is also anticipating a good year as payouts from a number of high-profile mass tort cases completed in the last few years finally start to roll in.

Managing partner Joel Feldman said that because the nature of a plaintiffs personal injury practice bases profits on contingent fees, the state of the economy in any given year has little effect on that year's revenue.

Profitability, he said, hinges more on proper planning.

"Hopefully, we've done really good screening and have taken only the cases we should have," he said, explaining that the firm is able to get a pretty accurate idea of how much each case is potentially worth even before agreeing to take it.

Then, as cases are successfully completed, the rewards trickle in during what can sometimes be long periods of time.

"Downturn would affect other firms more than us, because some of the payouts we receive could be two or three years old," he said.

Feldman, who declined to give specific numbers regarding associates' pay, said bonuses are, partially, based on work quality, but fee origination is also a major source of supplemental income for associates.

"If they're the source of business that was settled during the year, that gets factored into their bonus," he said, explaining that associates get a percentage of the profits from cases they brought into the firm and that a good year for Anapol Schwartz, generally, translates into a good year for associate compensation.

"Bonuses are based on how we do in the year," he said. "2008 should be better [than 2007]."

In some firms, associate bonuses are either rare or nonexistent, and rewards are given almost exclusively through pay raises. The philosophies for using this system vary among firm leaders.

"It's been our view that bonuses are counterproductive and the best way to compensate and reward associates is through salaries," said Alexander Henderson III, managing partner of Hartman Underhill & Brubaker in Lancaster, Pa.

Henderson said he doesn't feel associates should be rewarded based on the health of the national market.

"I don't want next year's economy to affect how they're compensated," he said.

Though he also declined to provide exact figures, he said base salaries for associates are increased each year.

Jeffrey T. Wiley, managing director and chief operating officer of Pittsburgh firm Dickie, McCamey & Chilcote displayed similar thinking.

He said it's possible the firm may give an associate a cut of the contingent fee from a major personal injury case he or she was involved in, but it is not firm policy to give out performance-based bonuses.

"We expect all of our lawyers to work hard, and that is recognized in the salaries," he said, adding that he could not remember the firm ever handing out an associate bonus in the 10 years he has been there. "We sit down and review each associate annually" to determine the amounts of increases in their salaries.

David B. Pudlin, a partner at Philadelphia-based Hangley Aronchick Segal & Pudlin, said his firm has no set policy of rewarding associates with bonuses, although it will, occasionally, give them if the firm has an exceptionally good year.

"When the firm does well, we share it with our associates," he said, recalling that the last time that happened was in 2006. "It's not uncommon, but it's not planned."

Hangley Aronchick's philosophy is the direct opposite of that of Hartman Underhill in that it wants its associates to feel the ups and downs of good and bad years.

"We distribute financial information to associates," he said. "We have associates participating on all of our committees, including our governing board. We let them participate so they develop a proprietary feel for the place when the firm does well. It lets associates share in the success. I guess on the other side of that is when it's just kind of a flat year they share in that as well. It all sort of fits together."

But Pudlin insists the firm doesn't intend for bonuses to be viewed as incentive for logging more billable hours.

In fact, he said, an extraordinary number of billable hours per associate tends to raise concerns in the firm.

"We don't necessarily think it's a good thing," he said. "It probably means we need more associates."

As far as salary increases, Pudlin said the firm has annually increased existing attorneys' salaries by $4,000 across the board for the past few years.

"We don't compress salaries," he said. "We tend to have $4,000 increments from class to class regardless of the level."

He said the firm so far has not discussed deviating from that number.

"It's pretty much been in place for a number of years, whether it's a good year or a less [than] good year," he said. As in most other firms, the base salaries for first-year associates at Hangley Aronchick are contingent upon trends dictated by large firms.

"We tend to compete against the larger firms for the associates we hire," he explained.

The firm bumped up its starting salary from $125,000 in 2006 to $135,000 in 2007 (with existing associates getting a $14,000 pay raise that year to make up the difference) but so far has not discussed increasing that number again this year.

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