Monday, September 05, 2011

The Bonus Culture



Bonuses are all the rage now. Rupert Murdoch was given $12.5 million in his $33 million pay package from News Corp. this year which is up 47% on last year. And his son James was awarded $6 million. The difference is that James seems to realize that the Murdochs might not have actually deservedly earned these bonuses. He has declined his but Rupert is keeping his. With an extended family he probably needs it.

At a slightly more mundane level it has been spring bonus time for associates in big law firms. Amy Kolz has written an incisive article, "A Waste of Money: Spring bonuses didn't help retain associates during the boom times, so why did almost 50 firms dole them out again this year?" (H/T to Peter Lederer)

The upshot is that as one or two firms published that they were paying associates between $2,500 and $20,000 bonuses then the others joined in and to cap it a further couple of firms then decided to award more. Justification? Hard to discern unless you have the mentality of a sheep or lemming (in the old but discredited Disney sense of cliff-jumping).

Kolz argues convincingly that these bonuses achieve nothing. Associates like them but they won't persuade them to stay with a particular firm. Why should they? Everyone does it. It all cancels out.

Kolz writes
"Clients are watching, and we all have to be careful that we're operating in a way that gives clients value for what they're paying," Milone, chair of Morgan Lewis, says.
It's a reasonable concern. Though general counsel may not resent the spring bonuses per se, they are wary of any development that could lead to higher costs, says Frederick Krebs, the recently retired president of the Association of Corporate Counsel. "If these bonuses result in increased rates and increased costs, then it will be a problem," he says.

Of course, the risk of alienating clients and increasing compensation costs in an uncertain economic environment might be worth it if it was clear that these bonuses helped to retain or attract associates. But it's not. An examination of the results of our 2011 Midlevel Associates Survey shows that there is no statistically significant relationship between associates' ranking of their compensation and benefits and their expectation that they will still be at their firm in two years. (For statistics wonks, the r-squared in our linear regression analysis was only 0.026.) Our finding echoed a 2007 study that Indiana University Law professor William Henderson did based on our 2004 Midlevel Associates Survey—he also found that the relationship between compensation ratings and the expectation that associates would stay two more years at their firm was close to zero. (emphasis added)
The danger is that these costs will be passed on to clients who are already angry over law firm billings.  The alternative is that partners take less which is most unlikely. Some years ago Mark Chandler, general counsel of Cisco, said he was looking to law firms reducing their costs year on year, not raising them.

Law firms have no institutional memory to speak of nor are they smart about how they organize their businesses. That's not to say they aren't clever people, they are. But the herd mentality among law firms is startling. Forget what we've done in the past, and let's do it again, again, again.

It doesn't matter whether it is pay, bonuses or mergers, the result is the same. They did it so must we. Without asking if it is a good course of action. Law firms aren't going to cover themselves in glory with this one. And finally associates know exactly what the game is: they are not fooled by these tactics. Here's one
Associates also understand that there can be an implicit trade-off between money and quality of life at a firm. "I'm not thrilled that we didn't receive a [spring] bonus, says one associate at Baker & McKenzie. "But the work I do is phenomenal, and the clients are phenomenal, and if I want to play at this level [of practice], you sometimes have to go along with certain things, whether it be a [slightly] lower compensation level or [if I were somewhere else, perhaps] the requirement to work 2,600 hours," he says. The associate says he has no plans to leave Baker.
 
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