US firms get tough on pay

Greg Jordon

Last Thursday (19 November) Skadden Arps Slate Meagher & Flom did what the New York ­market had expected it would and matched the associate bonus unveiled earlier this month by ­Cravath Swaine & Moore.

First-year associates at Skadden have been given a $7,500 (£4,500) bonus, the same as Cravath’s. ­Second-year associates have been awarded $10,000, and the scale then extends in increments of $5,000, reaching $30,000 for associates who have been at ­Skadden since 2002.

Cravath kicked off the ­traditional end-of-year US bonus season when it revealed its award for first years would be $7,500, a drop of 57 per cent from last year’s $17,500.

The news, first revealed on US legal blog, ­confirmed that, unlike last year when Skadden’s bonus was twice that of Cravath’s, this year there is ­unlikely to be any noticeable ­differentiation between the two.

If anything this year’s bonus ­season is the most significant ever. Skadden’s closely watched announcement comes at a time of massive upheaval among ­associate ranks. In particular, Reed Smith has been shaking up ­associate remuneration, cutting pay by 20 per cent and replacing the ­longstanding lockstep with the introduction of bandings for ­junior, mid-level and senior ­associates.

Like the top firms’ bonuses, Reed Smith’s ‘new talent model’ may well set a template that will be followed by many other firms.

“Reality is dawning,” says Jomati consultant Tony Williams. “The profits at most US firms are likely to be flat or down, probably by around 5-10 per cent, with a few exceptions. This year bonuses are only going to be given very, very sparingly.”

Reed Smith is one of the few firms to have gone even further than simply ditching lockstep for associates. Last week the firm’s chairman Greg Jordan said non-equity partners would be asked to provide up to 15 per cent of their base pay as a capital contribution and a way of maintaining partnership status. Those who refuse will no longer be partners.

As far as Reed Smith’s actions are concerned, Williams is even more blunt. “It’s economics,” he stresses. “It boils down to a simple equation which is, ‘if you think you can do it better, then bugger off’. No other firm has been as straightforward or aggressive as Reed Smith. I take my hat off to them.”

This move, in combination with Reed Smith’s announcement that it would remove associate ­lockstep, amounts to some of the ­boldest law firm changes so far.

And it seems that some of the firm’s rivals, even those yet to introduce similar schemes, can see the benefit.

Morrison & Foerster IT partner Alistair Maughan, for example, said that linking pay to skill sets rather than having lawyers ­”hanging around and just getting more money for time served” made sense.

But Maughan also argued that the Reed Smith approach, under which associates will need to be assessed continually on a range of factors and skills, could lead to more administration and be more time-consuming.

“As long as firms exercise regular ­evaluation, the more traditional model has the benefit of ­simplicity,” adds Maughan.

Nevertheless, the signs are that even New York’s elite firms are considering introducing some of the measures used by Reed Smith.

Last week the London ­managing partner of one top New York firm said he was in favour of ­dropping associate lockstep, at least for English lawyers.

“In terms of abilities, people progress at different speeds, so having some concept of junior, mid and senior bandings of associates makes sense,” said the managing partner. “I also think that this would be consistent with what’s happening at the UK firms. It’s just ­modernising the system.”