In 2007, Sullivan and Cromwell, a large New York law firm with offices around the world, raised its starting salary for law school graduates from $160k up from $145k the previous year. But then, like at many other law firms, their starting salary did not increase again until 2016, when it increased to $180k. Indeed, in the intervening years some firms cut salaries and jobs. The New York times reported that law firms experienced a decline in their services following the financial crisis. In fact, Dewey & LeBoeuf, which just a few years previously had 2,500 employees (1400 attorneys) in 26 offices around the world, filed for bankruptcy in 2012. Although the root cause can be debated, one point of view is that the firm embraced unfettered growth (including a larger merger in 2007) and also engaged in aggressive poaching of attorneys from other firms by offering large, multiyear guaranteed pay packages. When business declined they were stuck with large fixed compensation cost and also some would argue a weakened culture, making it difficulty to rally the troops. Indeed, most partners, once they felt things were going downhill, defected to other firms. In such firms, top partners might earn 9 times what some other partners earn. In contrast to the Dewey and LeBoeuf approach, many law firms still follow the traditional law firm approach to compensation which is a lockstep model where partners are paid to an important degree based on seniority with a narrower band when the highest paid partners make 4 to 5 times as much as some other partners. Talent is largely groomed from within, as opposed to significant poaching of attorney f from other firms. Most large firs, including Sullivan & Cromwell, use pay structures with 6 to 8 levels between associate to partner. The associates level is typically based on experience plus performance. In the world of associate attorneys, performance is measured as billable hours. So, the associates who meet or exceed the expected billable hours advance to the next level each year. Similar to the tenure process in academic settings, after 6 to 8 years associates are expected to become partners or find opportunities elsewhere. The likelihood of making partner differs among firms, but he norm seems to be that fewer than 1/3 of the associates make it. Associates are expected to bill around 2,200 hours per year. That works out to six hours a day 365 days per year. Sullivan 7 Cromwell partners reportedly earn an average of $2.97 million a year.

Exhibit

Associate Base Salary
Year	Base Wage	Associate Bonus	Total Comp
1	$180,000	$15,000	$195,000
2	$190,000	$15,000	$205,000
3	$210,000	$25,000	$235,000
4	$235,000	$50,000	$285,000
5	$260,000	$65,000	$325,000
6	$280,000	$80,000	$360,000
7	$300,000	$90,000	$390,000
8	$315,000	$100,000	$415,000

1. Clients are billed about $250/hour for each associate. (Some partners billing rates in New York firms have now hit $1,000 per hour.) So if associates hit or exceed their targets they generate $550,000 annually ($250 times 2200) Many firms also use performance bonuses for associates. At Sullivan & Gromwell, associate bonuses ranged from $30k - $65k a few years ago. More recently, as the exhibit shows, bonuses have gone higher. The New York Times described the recent overall trend as Big Law Firms Bring Back Hefty Bonuses for Associates. Which is attributed to a recovery for corporate America in driving legal work on mergers and acquisitions, stock and bond offerings, and intellectual property matters. One observer also suggested that law firms are adopting a version of the wall street pay model, which links bonuses to overall profitability of the firms. Another observer stated, What we are continuing to see is law firms are looking for talent who can handle files on their own and bring high value to corporate clients.

2. When considering the research evidence discussed in the book. Would you expect the Sullivan & Cromwell associates to feel that their pay structure is fair? What comparisons would they likely make? What would behaviors would you expect Sullivan & Cromwells pay structure to motivate? Explain.

3. What about associates who joined the firm 4 years ago? If the salaries for new associates increased by $20k what would you recommend for other levels in the structure? Explain.