Compensation 11th Edition by George Milkovich,Jerry Newman,Barry Gerhart

Exercise 2

Several years ago, Sullivan Cromwell, a large New York law firm with offices around the world, raised its starting salary for law school graduates to $160,000, up from $145,000 the previous year. But, at Sullivan Cromwell, like at many firms, starting salaries have not increased since. Indeed, some firms have cut salaries and/or jobs. The New York Times reports that law firms have seen a decline in demand for their services since the financial crisis. In fact, Dewey LeBoeuf, founded in 1909, which just a few years ago had 2,500 employees (including 1,400 attorneys) in 26 offices around the world, recently filed for bankruptcy. Although the root cause can be debated, one point of view is that the firm embraced unfettered growth (including a large merger in 2007) and also engaged in aggressive "poaching" of attorneys from other firms by offering large, multiyear, guaranteed pay packages. 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 such firms, top partners might earn 9 times what some other partners earn. In contrast to the Dewey LeBoeuf approach, many law firms still follow the traditional law firm approach to compensation, which is a lock-step model where partners are paid to an important degree based on seniority within a narrower band where the highest paid partners make 4 or 5 times as much as some other partners. Talent is largely groomed from within, as opposed to significant poaching of attorneys from other firms. Most large firms, including Sullivan Cromwell, 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 1). 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 less than one-third of the associates make it. Associates are expected to bill around 2,200 hours per year. That works out to six hours a day 365 days per year. Sullivan Cromwell partners reportedly earn an average of $2.97 million a year.
Clients are billed about $250/hour for each associate. (Some partners' billing rates in New York firms have now hit $1,000 per hour.) So if associates hit or exceed their targets, they generate $550,000 annually ($250 times 2,200 hours). Many firms also use performance bonuses for associates, capped at around $60,000.
EXHIBIT 1 Pay Structure at a Law Firm

How does the Sullivan Cromwell approach to compensation differ from that of Dewey LeBoeuf What are the advantages and disadvantages of each approach