With Monday's announcement that its associates will get fatter year-end bonuses in 2012 than they did in 2011, Cravath, Swaine & Moore cut through some of the gloom that has clouded the financial outlook for large law firms of late.
The question now is whether Cravath's peers will mimic it in doling out extra compensation as they have in the past—or pull back in light of the modest revenue growth most industry experts are expecting this year.
As of Tuesday, few were rushing to follow suit.
Indeed, The Am Law Daily's calls for comment on year-end bonuses to a dozen Am Law 100 firms—Davis, Polk & Wardwell; Kaye Scholer; Kirkland & Ellis; Milbank, Tweed, Hadley & McCloy; Paul, Weiss, Rifkind, Wharton & Garrison; Proskauer Rose; Ropes & Gray; Shearman & Sterling; Simpson, Thacher & Bartlett; Skadden, Arps, Slate, Meagher & Flom; Sullivan & Cromwell; and Weil, Gotshal & Manges—went unreturned, yielded a "no comment," or elicited a response that it was premature to discuss the subject.
A senior partner at one Am Law 100 firm who declined to comment on whether associates there can count on receiving Cravath-level bonuses described the standard-setting firm's 2012 scale as "a big bump." One possible reason for this partner's curt response: matching Cravath on associate bonuses can get pricey for its rivals given that their associate class sizes are typically larger and their partner tracks are generally longer.
Tuesday's silence on the topic notwithstanding, if recent history is any guide, many top-tier firms will choose ultimately to fall in line behind Cravath, with only minor tweaks to its bonus scale.
That scale—according to a memo sent to Cravath associates Monday and obtained by The Am Law Daily—calls for first-year associates to get bonuses of $10,000 apiece this year, a 33 percent increase over the $7,500 last year's first-years received. Seventh-year associates will also get 33 percent more in bonus money this year, $50,000 apiece compared to the $37,500 they received last year. And for the first time, Cravath announced bonuses for an eighth-year class, members of which will get extra payments of $60,000 apiece. Unlike last year, the firm also included a partial prorated bonus of $10,000 for this fall's incoming class. (News of the Cravath announcement was first reported by The New York Times.)
Though Cravath's year-end bonuses are bigger this year than they were in 2011, the total extra compensation its associates will receive this year is actually down slightly from last year, when the firm—like many of its top-tier rivals—gave out spring bonuses.
The 2012 bonuses will be given out a few weeks later this year than last, on December 21, according to the memo, which was signed by Cravath presiding partner Evan Chesler, deputy presiding partner C. Allen Parker, litigation head Robert Baron, and corporate head William Fogg. (As first reported by Above The Law and confirmed by The Am Law Daily, Weil executive partner Barry Wolf notified the firm's associates in a Monday memo that—in a move that returns the firm to a distribution schedule in place prior to 2010—year-end bonuses will be paid on January 31.)
The Cravath memo said the firm is not applying "any billable hour or similar criteria in determining eligibility" for the bonuses. At the same time, a Cravath source tells The Am Law Daily that the heftier bonuses reflect an awareness among firm leaders that associates have been shouldering an increased workload this year and are likely to rack up 10 percent more billable hours than they did last year. By way of comparison, a recent report from Wells Fargo Private Bank's legal specialty group projected that hours for associates at most firms would end up flat for the year.
The increased workload is a product of major assignments the firm has taken on in both the transaction and litigation arenas. On the litigation front, for instance, the firm is serving as national coordinating counsel in federal and state residential mortgage-backed securities litigation for JPMorgan Chase, while also representing Credit Suisse in separate litigation stemming from the credit crisis.
On the transactional side, Cravath has advised Kraft Foods Group Inc.'s North American grocery business in an August spin-off valued at $26 billion; Grupo Modelo SAB de CV in connection with its $20 billion sale of a 49.7 percent stake to Anheuser-Busch InBev NV in June; and Pentair Inc., on its $10 billion merger with Tyco International Ltd. in March.
For Cravath's senior associates, 2012 marks the first time the firm's bonus scale has approached prerecession levels. Seventh-year associates last received regular year-end bonuses of $60,000 in 2007; this year's seventh-years are receiving $50,000. In 2007, however, associates also got "special" year-end bonuses that added between $10,000–$50,000 to their regular bonuses because of the firm's robust financial performance. (In 2006, Cravath's first-years were given a whopping $35,000 year-end bonus, three-and-a-half times as much as their counterparts will receive this year.)
Dark days followed. Cravath halved bonuses to mid- and senior-level associates beginning in 2008, and cut the junior-most tier by as much as two-thirds; other firms eventually followed Cravath on the way down.
Cravath's bonus announcement may come as a bit of a shock to many law firm leaders at a time when Wells Fargo and other industry watchers are predicting anemic revenue growth. But the firm's move underscores another trend: that the most profitable firms are pulling away from the pack. Profit increases for the dozen firms with average profits per partner of $2 million-plus that Wells Fargo surveyed are projected to see revenue grow 7.9 percent.
Of course, not every firm in The Am Law 100 cares about the so-called Cravath scale.
"We really don't follow the New York bonus program at all," says John Murphy, chair of Kansas City, Missouri–based Shook, Hardy & Bacon. The firm did away with production-based bonuses several years ago, he says, "because it wasn't sending a very good message to clients."
Instead, the 475-lawyer firm assesses half-a-dozen factors in addition to production, including evaluations, pro bono work, and firm citizenship, and doles out bonuses—typically smaller than what New York firms give—by year-end. And because the total amount to be given out is set in the first few months of the year, Murphy adds, the firm's financial performance over the course of the year is not a factor.
Sara Randazzo contributed reporting.
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