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Scotching hopes raised by the recent uptick in corporate transactions, large New York law firms have declined to increase their year-end associate bonuses, reflecting what several managing partners say is a desire to rein in skyward trends in young lawyers’ compensation. In recent weeks, major New York firms including Cravath, Swaine & Moore; Sullivan & Cromwell; Davis Polk & Wardwell; and Paul, Weiss, Rifkind, Wharton & Garrison have announced first-year bonuses of $17,500 and senior associate bonuses of between $25,000 and $30,000. Though top law firms have seen a surge in activity in the last few months, they are paying bonuses identical to those paid last year. Bonuses in 2002 were already down dramatically from 2000, when first-year associates at top firms received $40,000 bonuses and senior associates received $100,000. The difference, according to New York managing partners, is that in 2000, now-defunct Brobeck, Phleger & Harrison was still the firm of the future and New York firms were engaged in a pitched battle to recruit young lawyers tempted by Silicon Valley firms introducing ever-larger paydays. Indeed, the present base salary of $125,000 for first-year associates at most major New York firms was, like higher bonuses, introduced in response to salary hikes at West Coast firms, where first-year salaries eventually topped out at $135,000 before receding at many firms. Skadden, Arps, Slate, Meagher & Flom eventually raised its first-year compensation to $140,000, though the firm has since paid correspondingly lower bonuses, so its associate pay is generally in line with that of other firms. Among New York firms, only Wachtell, Lipton, Rosen & Katz regularly paid large bonuses before the dot-com years. The firm, the most profitable in the nation, this year paid associates between $50,000 and $170,000 in bonuses. “What happened a few years ago was caused by a small number of firms in Northern California,” said Mel Immergut, chairman of Milbank, Tweed, Hadley & McCloy, which recently announced bonuses to all associates in all offices ranging from $17,500 to $25,000. “Looking back on it, I kind of think my reaction to it then was correct,” he said. “It was unfathomable.” Today, San Francisco-based Brobeck is no more, Cooley Godward in Palo Alto, Calif., is eager to find an East Coast merger partner, and Wilson Sonsini Goodrich Rosati, also in Palo Alto, has shed almost a third of its lawyers. The managing partner of a major New York firm who asked to remain unnamed said the end of “all that West Coast, dot-com craziness” was giving New York firms an opportunity to curtail past excesses in associate pay. “There really is a need to rein that sort of thing in,” he said. “Whether one year is a little better than another year should not make a difference.” At Dewey Ballantine, co-managing partner Sanford W. Morhouse agreed, and said New York firms had recently taken a “more disciplined approach” to the sensitive issue of associate pay. “I think the bonus ranges now being announced by the New York firms are an example of that approach,” he said. WALL STREET MODEL Even at the height of the boom, law firm associates continued to receive most of their compensation in the form of salary rather than bonuses. But the $100,000 bonuses of recent years seemed to be pushing law firms in the direction of the compensation model of Wall Street investment banks, said Morhouse, where enormous bonuses form the lion’s share of the compensation for professional staff. But if law firms are trying to ditch Wall Street-size bonuses, some are looking to accustom associates to the practice common in the financial services industry and elsewhere of tying bonuses strictly to performance, something many law firms have so far been reluctant to do. Morhouse said the present market was a good one in which to introduce a more performance-based bonus model at firms. This year Dewey Ballantine announced bonuses ranging from $17,500 to $25,000 for most associates but scrapped bonus caps tied to associates’ class years. Bonuses are tied to performance, with hours billed and other factors taken into consideration. For a handful of high-performing associates, the firm will pay bonuses ranging from $30,000 to $50,000. Because the firm’s bonuses are no longer paid according to class year, a Dewey first-year could theoretically receive a $50,000 bonus, though Morhouse said that had not happened. The converse is that some associates will receive less than their peers or even nothing at all. Morhouse said 75 percent of Dewey associates will receive a bonus. “I think it’s an improvement to not have limited bonus criteria to chronology,” said Morhouse, adding that he thought the new system would incentivize individual lawyers. But a partner at another major firm said performance-based bonuses were not worth the lasting resentment they frequently engendered from associates who felt they were unfairly judged. “They need to be very clear about what criteria they’re using, especially for younger associates,” the partner said. “Look at what happened at Clifford Chance.” ASSOCIATE CONCERNS Last fall, surveys of New York associates at Clifford Chance resulted in a scathing memo in which associates accused partners of stinginess and unfairness in the rewarding of bonuses. The charges received a thorough airing after the memo was leaked to the press, and Clifford Chance instituted a number of reforms to address the dissatisfaction raised in the memo. At the New York office of Jones Day, similar charges are now circulating, as many associates find their expected bonus has not materialized. One associate, who asked to remain unnamed, said the firm traditionally informed associates of bonuses in year-end individual letters also detailing base compensation in the year. This year, he said, most letters for junior associates contained no bonus information, and the handful of mid-level and senior associates bonuses appear to be fairly small. “Everyone is just very worried about it,” the associate said. “It’s a signal that New York associates are generally not appreciated and there’s no concern about whether people stay or leave.” The associate said many junior lawyers were concerned that Jones Day was preparing to take in as many 75 associates from the intellectual property boutique Pennie & Edmonds and might therefore be encouraging other associates to leave. Dennis W. LaBarre, partner-in-charge of Jones Day’s New York office said through a spokesman that the firm did not discuss compensation issues but that bonuses were based on individual performance. But if many partners now see an opportunity to turn back associate pay trends, they also acknowledge they may be forced to loosen purse strings again if the economy really picks up. “I don’t right now have any idea, if we return to the knock-the-cover-off-the-ball years, whether bonuses will go up to where they were, stay the same or increase a bit more,” said Milbank Tweed’s Immergut. “That’s a year in the future. It’ll be a good problem to have.”

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