Notice And Comment: Bonuses Based On Practice Area
Are practice-based bonuses the future of Biglaw—and is this a good thing?
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Last month, Paul Weiss announced special bonuses for associates and counsel. But in a divergence from the firm’s standard practice on bonuses, they’re not being paid out to all associates and counsel on a lockstep or seniority-based scale. Nor are they tied to hitting a specified hours target, as they are at many other firms. Instead, according to the memo from Paul Weiss chair Brad Karp, these special bonuses are going to lawyers “who exhibited exceptional commitment in support of our firm and our clients during the first six months of 2021.”
Paul Weiss sources speculated to Above the Law that the bonuses are being distributed based on practice group. My guess is that this speculation is correct—and that the lawyers being blessed with discretionary bonuses are predominantly if not entirely in extremely busy, lucrative transactional areas like M&A, capital markets, and private equity.
This isn’t the first such move in 2021. In August, Skadden Arps announced retention bonuses that will be paid to select associates still employed at the firm as of June 30, 2022. Again, Skadden sources suggested to Above the Law that these bonuses are going to “associates in certain, highly sought-after practice groups, such as M&A and capital markets in the New York office.”
Are bonuses based on practice area in the future of Biglaw? And if so, is this a good thing?
Let’s weigh the arguments. Here’s the case against paying bonuses based on practice area, which is obvious—and which might explain why firms aren’t being upfront about the practice:
Firms claim to be about collegiality and collaboration, but treating lawyers in certain practice areas like second-class citizens is neither collegial nor collaborative. Diversification is a virtue of Biglaw firms compared to, say, litigation or transactional boutiques, and Biglaw’s most profitable practices will change over time. In boom markets, transactional practices will be the most lucrative, while in down markets, litigation and bankruptcy will pick up the slack. So firms should treat associates equally, since over time, it will all balance out in the end.
To favor some practices over others when it comes to bonuses will demoralize lawyers in the disfavored practices. Lower morale leads to associates who do less work, produce lower-quality work, and eventually leave. Associate attrition comes with significant costs for firms, both financial and cultural—recruiting and training new associates costs money, and constant associate churn makes it harder to sustain a firm’s culture.
As a former litigator, I don’t like litigators getting the short end of the stick, which is generally what’s happening today with practice-based bonuses. But to play devil’s advocate, here are the arguments in favor of them:
Compensation based on contribution to profitability is the way of Biglaw. At most firms, setting aside the (shrinking) number of true lockstep firms, partner compensation is tied to how much the partner contributes to the firm’s bottom line. Why should associate compensation be any different?
As long as the major practice areas1 were roughly equal in terms of their contributions to law firms’ bottom lines over some reasonably long period of time—i.e., a period of time including both economic expansions and recessions—it made sense to not discriminate based on practice area. But in recent years, corporate/transactional practices like M&A and cap markets have outstripped practices like litigation and bankruptcy by such a large margin, for such a sustained period of time—basically since the end of the Great Recession, some 12 years ago—that compensating associates without regard to their practices no longer makes sense.
When the economy sours and litigation and bankruptcy start generating more revenue than transactional work, litigation and bankruptcy associates can get bigger bonuses than their corporate peers at that time. For now, though, transactional associates deserve more.Practice-based bonuses simply reflect supply and demand, and there’s more demand for transactional associates because they have more exit options. The special bonuses being showered upon Biglaw associates are partly to reward them for their hard work, and partly to keep them from leaving—not just for rival law firms but for other alluring sectors, including private equity, hedge funds, venture capital, and startups. And the opportunities for transactional associates in these areas vastly outstrip those for litigators—so deal lawyers need to be offered more money to stay. (For more on this gap in exit opportunities, see my story from last year, Mammas, Don’t Let Your Babies Grow Up To Be Litigators.)
Readers, what do you think? If you were running a full-service Biglaw firm, would you pay different bonuses based on practice area? Please share your views in the comments to this post.
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The big divide is between corporate/transactional practices and litigation practices. A (shrinking) number of Biglaw firms have certain small, niche practices that don’t fall into either group, like trusts and estates—but these practice areas are so small that paying lockstep bonuses to the handful of associates in them isn’t really an issue. Tax and executive compensation/employee benefits practices can be placed on the transactional side of the ledger, since at most Biglaw firms, these practices support—and are absolutely essential to—M&A and other major transactional practices.
As someone who long ago was an equity partner at a mid-sized Chicago firm, more recently the GC of a public company and now the owner of two private companies, even if I agreed with the choice, I would not hire the firm to do work in the currently disfavored practices. If I'm paying for the "best", I don't want to take on a known risk of low morale associates working on my matters. I disagree with the choice though. There's mountains of research showing that supportive and accountable environments lead to better job performance and any firm that continues to operate this way is almost guaranteed to be doing suboptimal work.
This may be my bias as a litigator, but there's a certain amount of "what's good for the goose" here if things start going this way. By all means, hand out bonuses to M&A folks this year, but then I want my retroactive practice area bonuses from the early to mid teens given that litigation was crushing it in that era and not only did we not get more, bonuses were cut *across the board, including for litigators* because transactional practices weren't doing as well.