Will BigLaw Follow Baker McKenzie's Lead On Bonuses?
Law360, November 22, 2022
By Aebra Coe
Baker McKenzie announced year-end associate bonuses on Friday, and as of Tuesday afternoon, there were crickets from the rest of BigLaw on whether they would follow the global giant's lead.
Despite being a first-mover on associate bonuses in 2020, Baker McKenzie is not among the handful of law firms that have long held sway over the compensation decisions of the 100-or-so largest law firms in the U.S.
When Cravath Swaine & Moore LLP or Davis Polk & Wardwell LLP announce a compensation decision, typically the response from peers and want-to-be peers is swift: they fall in line.
The rest of BigLaw may just fall in line with Baker McKenzie's bonuses, which are a modest bump up from 2021's year-end bonus scale set by first-mover Cravath. But historical data on bonuses plus financial data leads me to conclude that Baker McKenzie is no Cravath, and what happens next is really anyone's guess.
A first-mover is the law firm that comes out of the gate fastest when it comes to associate compensation, like Baker McKenzie this season. But to be a true market leader, other law firms need to follow that firm's lead. The two have not always been the same, especially over the past two years.
The History of First Movers and Market Leaders
Cravath has been the first mover on year-end associate bonuses in seven of the past 10 years and six of seven years between 2012 and 2018. Each of those years, the vast majority of the industry fell in line and adhered to Cravath's bonus scale.
In 2019, Milbank LLP led on bonuses and the industry followed.
However, things started to get a little messier in 2020, with a pandemic and a shifting environment for associate talent spurring renewed competition. There were two rounds of associate bonuses: special bonuses in the fall and year-end bonuses.
When it comes to the special bonuses, Cooley LLP was the first mover, but after Davis Polk proposed a steeper bonus scale, large law firms generally fell in line with those. For the year-end bonuses, Baker McKenzie led, but there was a range of reactions from other large law firms, with a number following suit and a number of others offering bonuses that exceeded Baker McKenzie's.
Similarly, in 2021, there were two different rounds of associate bonuses. The first was announced in the spring and was distributed throughout the summer. For those, Willkie Farr & Gallagher LLP led, but Davis Polk again upped the ante and BigLaw largely fell in line.
That winter, Davis Polk did it again, exceeding first mover Cravath, the long-time leader on pay, with a number of law firms following its lead.
I think we can only assume that Davis Polk could do the same thing this year for year-end bonuses. But with the topsy-turvy economy, will it?
In a market where demand is slowing and expenses are driving declines in average law firm profits, is it worth besting Baker McKenzie just to continue holding that title of market leader?
I spoke to law firm management consultant Kent Zimmermann, of the Zeughauser Group, on Monday, and he told me that "the calculus has changed" on associate compensation this year compared to last year as deal flow has slowed, demand has decreased for many firms, and many now have too many associates for the amount of legal work that needs to be done.
Still, Zimmermann believes the current moment is one in which highly profitable law firms have an opportunity to "pull away from the pack" so to speak on compensation. Many highly profitable firms have already done so when it comes to partner pay, while associate compensation has largely remained fairly similar among the top 100 or so law firms.
For the firms that have extra cash and can use it to offer more to associates while still keeping their partners happy? Now could be an opportunity to do that, Zimmermann said.
"I think it's worth watching closely for further segmentation of the market for associate compensation. I think conditions are ripe for that to happen," he told me. "Some firms are so profitable that they still can raise associate compensation just to try to open up a talent advantage compared to other firms. There's a large group of firms for which that will be painful."
First Movers and Market Leaders on Associate Bonuses
Cravath has dominated over the past decade when it comes to naming a scale for associate bonuses and inspiring competitors to follow, although in recent years there's been some deviation from that standard.
YEAR-END 2021: Cravath. Davis Polk exceeded Cravath and many firms followed Davis Polk's lead.
SPRING 2021: Willkie. Davis Polk exceeded Willkie and many firms followed Davis Polk's lead.
YEAR-END 2020: Baker McKenzie.
FALL 2020: Cooley. Davis Polk exceeded Cooley and many firms followed Davis Polk's lead.
YEAR-END 2019: Milbank
YEAR-END 2018: Cravath
YEAR-END 2017: Cravath
YEAR-END 2016: Cravath
YEAR-END 2015: Cravath
YEAR-END 2014: Simpson Thacher. Davis Polk exceeded those and many firms followed its lead.
YEAR-END 2013: Cravath
YEAR-END 2012: Cravath
What Does it Take to be a Market Leader?
Regardless of what move the Davis Polks and Cravaths make next, one thing is clear based on my conversations with industry experts: despite naming a price on associate bonuses in 2020 that generally stuck among a number of BigLaw firms, Baker McKenzie is not viewed by many as a market leader in the same way as those other law firms.
There is some prestige imbued on a firm, and it garners a good deal of press, when it is a first mover. But the Davis Polks of the world are likely to usurp the market leader title again and again.
One big reason for that is profitability. Not only do law firms that are more profitable have more ability to hand out higher compensation to associates simply because of their financial position, but they also have a leg up when it comes to prestige. And in the legal industry, profits per partner have long bestowed prestige to law firms, as well as a good deal of clout.
If you look at the market leaders over the past decade, they all rank extremely highly when it comes to profits per partner, on the Am Law 200 ranking.
In 2021, Davis Polk was ranked number three with $7 million in profits per partner, 2014 market leader Simpson Thacher & Bartlett LLP is ranked sixth with $6 million in PPP, Cravath is seventh with $5.8 million and Milbank LLP is 13th with $5 million.
Baker McKenzie, however, is 71st on the list with a PPP of $1.8 million.
Still, it's an interesting time to consider prestige and perception in the legal industry with some of the very best law schools withdrawing from the U.S. News & World Report rankings over the past week, according to another industry expert, Jennifer Swan Meyer, COO of Swan Legal Search.
"Perhaps we'll see some of that influence Big Law compensation," Swan Meyer said. "Does it matter which firms announce first? Or does it matter that firms actually end up matching or exceeding bonus scales?"
According to Zimmermann, law firms often command the respect of the rest of the marketplace when they are perceived as high performing in a particular area. For some, that could mean domination in a particular practice area or geography.
For a long time, "market leader" has meant "market leader in New York," with the BigLaw associate pay scale often referred to as the New York pay scale. And smaller, more profitable shops with a strong presence in New York, like Cravath, have dominated when it comes to setting that scale.
Could all of that change? It could. The U.S. News law school ranking may have felt utterly bulletproof as a measure of prestige until it began to show signs of cracking this past week. Maybe we'll be talking about the Baker McKenzie scale or the Cooley scale at some point.
But BigLaw is slow to change and often leans heavily on tradition and long-held ideas of prestige. I don't think we should expect a major shift any time soon.
--Editing by Nicole Bleier.
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