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December 2, 2007

Lawyers Compete, Except in Bonuses


The New York Times

BONUSES on Wall Street are going to be bad this year, except if you work at Goldman Sachs. Or, oddly enough, if you’re an associate at a white-shoe law firm. (Granted, the scale of banking bonuses is in a rarefied class of its very own, even when compared with law firms, but bear with me).

Cravath, Swaine & Moore announced last month that it was doling out special bonuses to associate lawyers of $10,000 to $50,000. The special bonus is in addition to the regular bonuses of $35,000 to $60,000, depending on seniority. When you add it all up, second-year associates will pocket $225,000 this year, more than John G. Roberts Jr., chief justice of the United States. (He makes $212,000.)

Just days later, Debevoise & Plimpton announced it would match the new bonuses virtually dollar for dollar, as if it had simply copied and pasted the numbers directly from Cravath’s memo. Almost in unison, most other top law firms followed suit.

Lawyers are smart, but this herd mentality seems absolutely irrational, economically speaking — and not because the compensation is too high. The top law firms have been stuck in copycat mode for years. As soon as one of them raises salaries for associates, the others fall in line almost immediately.

At first glance, it makes sense in a free-market kind of way that law firms rush to match one another’s compensation packages. They have to compete for talent, especially for the annual crop of law school graduates. Indeed, if they never raised salaries or bonuses, they would probably be accused of conspiring to keep costs down.

But think about this for a moment: Is there any other business in which every competitor matches salaries and bonuses almost identically? It will probably take you far longer than a moment to come up with one, with the possible exception of highly unionized industries. Lawyers’ closest business cousins, investment banks, typically pay their people based on merit and the health of their own businesses, while still being competitive in a down year (like Merrill Lynch.)

Law firms say they pay bonuses to stay competitive, which is true, but only to a point. It’s not as if an entire class of associates at Debevoise would walk out the door to Cravath just because it raised bonuses. For one thing, there are not enough job openings. And as terrific as Debevoise associates may all be, Cravath would never want to hire all of them. Perhaps it would try to pick off a couple of top associates, but then Debevoise could just match the money dollar for dollar. The same goes for the dozen other firms that matched bonuses.

The root of the problem may lie in the top law firms’ oddly egalitarian tradition of paying the same amount to associates at the same level. Many refer to it internally as “lockstep.” At some firms, that applies to partners, too, though that is becoming increasingly rare. And to be fair, some firms, though not necessarily the top tier, like Schulte Roth & Zabel, give bonuses based on billable hours, which critics say has the potential to encourage “bill padding” — a euphemism for fraud — or at the very least, a white-collar sweatshop.

Equal pay advocates say it fosters teamwork and prevents resentment. But it also does something else: It makes it so easy to compare compensation across firms that it becomes glaringly obvious when one firm is out of sync. In the rest of the world, employers often pay a range of salaries and bonuses for the same job, and no one is sure what the guy or gal in the next office is making, never mind the people at a rival firm.

Not every firm plays the copycat game, though. Wachtell, Lipton, Rosen & Katz has long paid its associates almost twice the market rate, in part because it is able to charge its clients more than the market rate. It generally doesn’t bill by the hour but by the project, like an investment bank.

Which brings us back to the original question: Why do a dozen elite law firms all match the bonuses for associates? More specifically, why would one firm raise its bonus, knowing that its rivals will immediately match it? What competitive advantage is created for the firm that goes first, beyond a brief morale boost among the troops and perhaps bragging rights for five minutes?

It calls to mind the masochistic “fare wars” among airlines, which often cut prices on competitive routes, forcing others to follow. But unlike an airline, a law firm has little hope of squeezing a competitor out of business — or in legal-speak, moving it “down from the first tier to the second tier.”

It also has very little to do with recruiting. Bonuses are for people who already have jobs. It is somewhat understandable if top-tier firms match first-year associates’ salaries so they can attract the very best students, but once they are employed, it makes less sense. Most people who switch firms at that tier do so because they think have a better chance of making partner somewhere else, or for lifestyle reasons.

Evan R. Chesler, Cravath’s presiding partner, told The New York Times last month that the firm had originally wanted to “thank our lawyers for the hard work this year and the good year we’ve had.”

IT’S a nice thought but somewhat specious. Partners at law firms are a notoriously greedy bunch — that’s why they accept so few new partners — making it hard to believe that they are willing to part with their money so easily. I suggest there is something else at play: Law firms match bonuses to secure bragging rights.

Within their risk-averse, insular world, it’s a way of saying, “We’re in the top tier.” But it doesn’t necessarily make good business sense. Though partners at elite firms routinely pocket millions, law firms have never been run as efficiently as truly great companies. After all, they’re run by lawyers.