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In October, when Davis, Polk & Wardwell informed associates they would not be receiving year-end bonuses, the news struck young lawyers across New York as a harbinger of woes unimagined in the boom years just past. Sure enough, by the middle of November, Shearman & Sterling had announced a major layoff due to the tumbling economy and other firms had followed with smaller cutbacks. Associates throughout the city began to accept that bonuses this year would be minimal or nonexistent. Then the bonus announcements started coming out. The bad news may return or even worsen in the new year, but for a few weeks this holiday season, the boom-year bonus wars made a comeback. To an outsider, the associate bonus wars can appear to be nothing more than a display of stomach-churning greed on the part of 20- and 30-somethings already earning salaries of $125,000 or more. But to those associates who participate and benefit, bonuses have become something of a bellwether of firm prestige and financial health, yet another way that firms can be ranked and compared. And, unlike last year, when virtually all top firms were in line at $40,000 bonuses for first-year associates, this year has produced some unlikely frontrunners and laggards, bucking the conventional wisdom about the pecking order of New York firms. Though debate never ceases, most accounts of that pecking order place Davis Polk; Simpson Thacher & Bartlett; Sullivan & Cromwell; Cravath, Swaine & Moore and Cleary, Gottlieb, Steen & Hamilton at the top of the pyramid. Debevoise & Plimpton and Skadden, Arps, Slate, Meagher & Flom are also frequently placed in the same tier. Wachtell, Lipton, Rosen & Katz exists on a wholly different plain, with partner profits and associate compensation far above all others. The top-ranked firms are always in competition for the same pool of young legal talent, even in tough economic times, said Jon Lindsey, a partner at Major, Hagen & Africa, the law firm consultancy and placement firm. This competition is exacerbated by the fact that many top firms hire relatively few lateral partners and some, like Sullivan and Cravath, hire none at all. They maintain pre-eminence by hiring, training and grooming for partnership the associates perceived to be the cream of the crop, generally fresh out of the top law schools. In the recent boom years, compensation became an increasingly important factor in associate hiring and retention, as young lawyers who might normally have gravitated to the top New York firms began to eye the potential riches on offer at investment banks, technology startups and Silicon Valley law firms. Swamped with more lucrative work than they could handle, the firms came up with the boom-year bonus as an inducement for associates to come and stay. A product of the boom years, the big bonus might have become an artifact of those years once the good times faded. The Davis Polk memo suggested that was exactly what was to happen. One firm, Schulte, Roth & Zabel, announced a performance-based bonus of between $30,000 and $80,000 in September, but a number of associates at other firms said they did not consider Schulte a market-setting firm. Skadden and Cravath, however, are traditional leaders in associate compensation. On Nov. 16, Skadden, whose first-year base salary of $140,000 is higher than the $125,000 at other top firms, announced bonuses of between $2,500 and $10,000 for New York associates. On Nov. 19, Cravath informed associates they would receive bonuses between $20,000 and $50,000. The bonuses were half the $40,000 to $100,000 Cravath paid last year, but nonetheless pushed first-year compensation to $145,000. Cravath set the $40,000 first-year bonus last year and became the firm to match again this year. Many did, albeit with varying conditions attached. Weil, Gotshal & Manges and a handful of other firms even pushed the top-level bonuses out to $60,000. PLANS REVERSED But Davis Polk still stood by its memo, and Simpson Thacher announced Dec. 9 that it would pay bonuses only half that of Cravath. So it was that two of the city’s most elite firms, whose associate ranks bristle with Ivy League credentials, whose profits-per-partner both exceeded $1.7 million last year, found themselves confronting a compensation market that was leaving them behind, causing a great deal of associate consternation. Last Friday, Davis Polk reversed course and announced to its associates it would be paying bonuses in line with those offered at Cravath. In the Oct. 5 memo, signed by the Davis Polk management committee, partners concluded that dropping the bonus this year was part of a “sensible, long-term approach to current conditions which will help the firm continue to provide our clients with the finest quality legal services.” In reaching its ultimate decision to pay a bonus last week, managing partner John R. Ettinger acknowledged Davis Polk had been “mindful” of other firms’ bonus announcements, but, he said, some other conditions had changed as well. Davis Polk had experienced an upswing in business in the closing weeks of the year and now expected to be busy for much of next year, Ettinger said. Among other matters, the firm is representing Comcast Corp. in its recently announced acquisition of AT&T’s cable properties, one of the largest such transactions this year. GRASS LOOKS GREENER Most associates reached for comment had little doubt that Davis Polk was responding to market pressures that had been building for more than a month. Associates at Davis Polk had been grumbling about the bonus for weeks, one associate said, and the topic had dominated a number of associate meetings, both formal and informal. As firm after firm announced bonuses, Davis Polk associates became more and more upset, but not just about the money. “A lot of people weren’t as worried about the money as much as they were worried about what this said about the firm,” one associate said. In the view of associates, by early December, what the Davis Polk no-bonus memo seemed to be saying was that one of the most prestigious and most profitable firms in the city would be paying its associates less than not only other top firms but a whole host of lower-ranked firms. Davis Polk associates found themselved ribbed by classmates who earned lower grades and did not make law review. Rumors began to circulate about Davis Polk’s financial health. It is a problem that, as of this writing, Simpson Thacher is still confronting. The day after Simpson announced its bonus range of $10,000 to $25,000, Sullivan & Cromwell announced bonuses of $20,000 for first-years and said some high-performing senior associates would be getting more than $50,000. According to one Simpson associate, there was resignation when Cravath and Skadden announced bonuses. This turned to indignation when, one after the other, other firms announced $20,000 first-year bonuses. The situation worsened, she said, when Cleary announced bonuses between $20,000 and $50,000. “Cleary had to relocate from their offices and they could still cough up a big bonus,” she said, referring to Cleary’s evacuation from its downtown offices after the World Trade Center terrorist attacks. Associates at Simpson are now hoping the Davis Polk reversal will shame partners into matching the other firms. One associate said rumors abound that Simpson partners had been waiting to see if Davis Polk would stick to its guns. It is a common belief among associates that, with its Oct. 5 memo, Davis Polk had hoped to set the bonus market at zero this year. Given this tough economic climate, many firms would have preferred not to pay a bonus. In November, many partners at firms throughout the city privately voiced agreement with the thought contained in Davis Polk’s October memo, that bonuses should not be “paid simply as a matter of course.” Once the bonus market started rumbling, though, few could resist. Late last week, Shearman & Sterling announced a bonus for associates, though the range has not been made public. Next year may be a different story. In the memo accompanying Cravath’s bonus announcement, presiding partner Robert D. Joffe noted a poor economic outlook and warned associates to expect “significantly reduced or no year-end bonus next year.” Cravath and most other firms have characterized last year’s bonuses as extraordinary, reflecting extraordinary economic activity. Associates may therefore be thinking twice about spending bonuses on designer clothes or exotic vacations. “I’m going to retire a huge chunk of my law school debt,” said a Davis Polk associate. “Next year, I’m going to start to save.”

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