Normally around this time of year, associates at New York’s big law firms begin gearing up for the annual ritual by which their employers award them year-end bonuses.

But this is obviously no normal year.

Indeed, with law firms’ major financial industry clients in a parlous state, the firms themselves laying off unprecedented numbers of lawyers and the overall economy in doom-and-gloom mode, the subject of bonuses, which are paid on top of base salaries that start at $160,000 for first-years, is an awkward one.

Recalling that last year Cravath, Swaine & Moore kicked off bonus season at the end of October by saying it would pay both a year-end bonus ranging from $35,000 to $60,000, as well as an earlier “special bonus” ranging from $10,000 to $50,000, the chairman of a rival New York firm said there would be little rush this year.

“I would find it impossible to believe that any firm would want to be out front in paying that first special bonus,” he said.

Those firms that take the lead in announcing bonuses, usually Cravath and Sullivan & Cromwell, effectively set the market for every other major firm, though many apply conditions or performance criteria to winnow the number of associates receiving a full bonus.

The scale of the expense and the almost compulsory nature of the market are widely resented by partners. But they also realize bonuses play a huge role in associate morale, recruitment and retention. Most managing partners who spoke to the Law Journal about bonuses cited potential problems with associates in requesting anonymity. But this year they all also mentioned another interest group keeping a watchful eye on bonuses: clients.

“All of the firms that do a lot of work in the financial sector are being inundated with demands for discounts,” said the managing partner of one Lower Manhattan stalwart. “The general counsel of a major financial institution, when he or she reads about these bonuses, is not going to think well of them.”

Another firm leader agreed.

“I would not want to go into a fee negotiation with a major client having just announced a big bonus,” he said.

Even firms like Davis Polk & Wardwell and Sullivan & Cromwell that have been at the center of activity in the financial crisis have had more high-profile than high-value work of late, he noted.

The subject of bonuses appears to have been the subject of some conversation at the August gathering of managing partners hosted by the Citigroup Private Bank. One firm head said his impression from that meeting was there would probably be no special bonus this year but that normal year-end bonuses would be paid in amounts unchanged from last year.

Of course, firms that feel associate pay has gotten out of control could seize upon the economic downturn to try to eliminate bonuses altogether.

Year-end bonuses were not commonly a part of associate compensation until the dot-com boom of the late 1990s – coinciding with a wave of national expansion by heretofore regional firms – created massive retention problems for busy firms. When the dot-com boom ended in 2001, there was an expectation by some firms, notably Davis Polk, that the “boom-year” bonus would also die. But then an announcement by Cravath got the ball rolling again.

Though lower until recently than during the tech bubble, bonuses have become an entrenched expectation for a full generation of associates. For that reason, several managing partners said they did not expect a renewed effort to kill the bonus this year.

Of course, much will depend on what Cravath and Sullivan & Cromwell do. H. Rodgin Cohen, chairman of Sullivan & Cromwell, said the firm has not yet discussed the issue. Cravath did not respond to a request for comment.

“Oddly, we would be followers, but I’m against slashing bonuses,” said one New York firm chairman. “This economy is bad, no question, but it’s not catastrophic for us. It’s not a basis to cut associates’ pay, which is what getting rid of the bonus would amount to.”

Decrease in Value

A number of firms have in the past regarded paying higher bonuses or salaries as a way to differentiate themselves in the marketplace, and past bonus seasons have seen firms attempt to one-up each other with incremental increases. But the swiftness with which competing firms typically match raises means the benefits of moving associate compensation benchmarks forward are usually fleeting.

“It doesn’t make a particle of sense,” the Lower Manhattan managing partner said of firms’ efforts to differentiate themselves through higher pay. He said firms that tried to do so this year would invite opprobrium from clients while gaining little reputational boost.

But Ralph Baxter, chairman of Orrick, Herrington & Sutcliffe, which announced last week it was laying off 40 associates and counsels, said the current economy would force many firms to rethink associate compensation, including whether they would go on matching the top New York firms.

Orrick already set its bonus structure earlier in the year, with maximum levels the same as last year, but Mr. Baxter said performance factors, including billable hours, will reduce the number of associates at the firm receiving a bonus this year.

Going forward, he said the current system was clearly “not sustainable” because it depends on being able to charge clients and work associates more and more. Firms’ inability to do so in the crisis economy they will face next year will force them to make major changes, he predicted.

“The market was set up assuming that every associate coming out of law school wanted to work 3,000 hours a year so he could make partner and work 3,000 hours a year for the next 20 years,” said Mr. Baxter. “Clearly, that’s not reality.”

Anthony.Lin@incisivemedia.com