Your Turn Climb the Legal Ladder Dewey & LeBoeuf, which just a few years previously had 2,500 employees (including 1,400 attorneys) in 26 offices around the world, filed for bankruptcy in 2012. The firm was formed in a merger of two blue-chip firm with very well-p aid partners (and thus very high billing rates) just before the Financial Crisis of 2008. It also engaged in aggressive "poaching" of attorneys from other firms by offering large, multiyear, guaranteed pay packages. Very unfortunate timing to accumulate so much expensive high-level talent and then have the business crater. 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 downhill, defected to other firms. In a firm like Dewey & LeBoeuf, to partners might earn 9 times what some other partners earn. In contrast, in the more traditional law firm approach to compensation, the highest paid partners make 4 or 5 times as much as some other partners. In a lockstep model, partners are paid to an important degree based on seniority. Talent is largely groomed from within, as opposed to significant poaching of attorneys from other firms. Most large firms 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 6.15). 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 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 that fewer than one-third of the associates make it. Associates are expected to bill around 2,200 hours per year. For example, partners at Sullivan & Cromwell reportedly earn an average of over $3 million a year. EXHIBIT 6.15: Pay Structure for Associates at Cravath Law Firm, by Year Year Base Salary Year-End Bonus Special Bonus 1 st $190,000 $15,000 (pro-rated) $7,500 {pro-rated} 2 nd 200,000 25,000 7,500 3 rd 220,000 50,000 10,000 4 th 255,000 65,000 20,000 5 th 280,000 65,000 27,500 6 th 305,000 80,000 32,500 7 th 325,000 90,000 37,000 8 th 340,000 100,000 40,000 Various estimates indicate clients are billed about $600/hour for each partner and about $300/hour for each associate by these large elite firms. So if associates hit or exceed their targets, they generate $660,000 annually ($300 times 2,200 hours). However, the most elite firms can charge even more for top partners and associates. For example, it is reported that at Kirkland & Ellis, partners are billing $1,000 to $1,800 per hour and associates are billing $600 to $1,100 per hour. Clearly, the revenue implications of these higher billing rates are substantial. Many firms also use performance bonuses for associates. Exhibit 6.15 above shows the 2021 pay structure at Cravath, typically the first large New York City firm each year to announce its associate base salary and bonus plan, which other such firms such as Sullivan & Cromwell typically follow (or nearly so). Like other firms, bonuses provide labor cost flexibility for law firms. When the economy is booming, especially when that translates into lucrative legal work on mergers and acquisitions, stock and bond offerings, and intellectual property matters, bonuses are higher to recognize contributions and to retain essential talent (and billable hours). (Note: A pandemic can create other types of business, such as bankruptcy.) Exhibit 6.15 shows Cravath is including not only a Year-End Bonus, which is typical, but also a Special Bonus, this year.

1. Think ab out the research evidence discussed in this book. Would you expect associates to feel their pay structure (Exhibit 6.15) is fair? What comparisons would they likely make? What work behaviors would you expect this pay structure to motivate? Explain.

2. 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. Any parallels to Merrill Lynch's FAs and SVPls?

3. A few years ago, Sullivan & Cromwell announced that year-end bonuses would be cut in half and in the following two years, bonuses were cut further. However, the trend was then re versed with bonuses subsequently being increased. Why do bonuses vary in this manner over time? How does this bonus variability over time compare to variability in salaries over time at these types of elite law firms? What explains the difference in the way salaries and bonuses are managed over time?

4. How does the more traditional approach to associate and partner compensation differ from that of Dewey & LeBoeuf? What are the advantages and disadvantages of each approach?

5. Why do think Cravath is offering not only the usual Year-End Bonus, but also a Special Bonus this year?