2. What about associates who joined the firm four years ago? If the salaries for new associates increased by $20,000, what would you recommend for other levels in the structure? Explain.

3. Partners make around 10 times the highest-paid associates. A wall street journal writer laments that law firms form “giant pyramids… (in which) associates at the bottom funnel money to partners at the top.” What is missing from the writer’s analysis? Hint: speculate about the likely differences in content and value of the work performed by partners compared to associates.

4. A few years ago, sullivan & cromwell announced that year-end bonuses will be cut in half, with a maximum of $17,500 for early-career associates and $32,500 for eighth-year associates. However, last year, bonuses ranged from $2,500 to $20,000 and for the current year, bonuses are estimated to be $1,000 to $5,000. Should sullivan & cromwell be concerned about difficulties in recruiting or retention?

5. How does the sullivan & cromwell approach to compensation differ from that of dewy & leboeuf? What are the advantages and disadvantages of each approach?
 

Several years ago, Sullivan & Cromwell, a large New York law firm with offices around the world, raised its starting salary for law school graduates to $160,000, up from $145,000 the previous year. But, at Sullivan & Cromwell, like at many firms, starting salaries have not increased since. Indeed, some firms have cut salaries and/or jobs. The New York Times reported that law firms experienced a decline in their services following the financial crisis. In fact, Dewey & LeBoeuf, founded in 1909, which just a few years ago had 2,500 employees (including 1,400 attorneys) in 26 offices around the world, recently filed for bankruptcy. Although the root cause can be debated, one point of view is that the firm embraced unfettered growth (including a large merger in 2007) and also engaged in ag- gressive "poaching" of attorneys from other firms by offering large, multiyear, guaranteed pay packages. When business declined, they were stuck with large fixed compensation costs and also, some would argue, a weakened culture, making it difficult to rally the troops. Indeed, most partners, once they felt things were going downhilI, defected to other firms. In such firms, top partners might earn 9 times what some other partners earn. In contrast to the Dewey & LeBoeuf approach, many law firms still follow the traditional law firm approach to compensation, which is a lock-step model where partners are paid to an important degree based on seniority within a narrower band where the highest paid partners make 4 or 5 times as much as some other partners. Talent is largely groomed from within, as opposed to significant poaching of attorneys from other firms. Most large firms, includ- ing Sullivan & Cromwell, use pay structures with six to eight levels from associate to partner. The associate's level is typically based on experience plus performance (see Exhibit 1). In the world of associate attorneys, performance is measured as billable hours. So the associ- ates who meet or exceed the expected billable hours advance to the next level each year. Similar to the tenure process in academic settings, after six to eight years associates are expected to become partners or "find opportunities elsewhere." The likelihood of making partner differs among firms, but the norm seems to be less than one-third 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 & Cromwell partners reportedly earn an average of $2.97 million a year. 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 2,200 hours). Many firms also use performance bonuses for associates. At Sullivan & Cromwell, associate bonuses ranged from $30,000 to $65,000 a few years ago. More recently, as Exhibit 1 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 observers also suggested that "law firms are adopting a version of the Wall Street pay model, which links bo- nuses to overall profitability of the firms." Another observer stated that "What we are continu- ing to see is law firms are looking for talent who can handle files on their own and bring high value to corporate clients."