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 & 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.
Questions
- Think about the research evidence discussed in the book. Would you expect the Sullivan & Cromwell associates to feel their pay structure is fair? What comparisons would they likely make? What work behaviors would you expect Sullivan & Cromwell’s pay structure to motivate? Explain.
- What about associates who joined the firm four years ago? If the salaries for new associates increased by $20,000, what would you recommend for other levels in the structure? Explain.
- Partners make around 10 times the highest-paid associates. A Wall Street Journal writer laments that law firms form “giant pyramids . . . (in which) associates at the bottom funnel money to partners at the top.” What is missing from the writer’s analysis? Hint: Speculate about the likely differences in content and value of the work performed by partners compared to associates. Any parallels to Merrill Lynch’s FAs and SVPIs?
- A few years ago, Sullivan & Cromwell announced that year-end bonuses will be cut in half, with a maximum of $17,500 for early-career associates and $32,500 for eighth-year associates. However, last year, bonuses ranged from $2,500 to $20,000 and for the current year, bonuses are estimated to be $1,000 to $5,000. Should Sullivan & Cromwell be concerned about difficulties in recruiting or retention?
- How does the Sullivan & Cromwell approach to compensation differ from that of Dewey & LeBoeuf? What are the advantages and disadvantages of each approach?
The correct answer and explanation is :
1. Sullivan & Cromwell Associates’ Perception of Fairness and Motivation
Sullivan & Cromwell’s pay structure might be perceived as fair by associates in terms of the transparent link between pay and performance. The model rewards associates based on billable hours and progression through the levels, with promotions occurring every 1-2 years depending on performance. This clear connection between effort (billable hours) and reward (compensation) is in line with equity theory, where fairness is perceived when employees believe their effort is appropriately compensated compared to others.
Associates would likely compare their pay to that of peers within the firm, as well as associates in other firms. They might also compare their work-life balance and billable hours to others in the same role. Since the firm sets a target of 2,200 billable hours annually, associates may be motivated to meet or exceed this target to earn performance bonuses or progress in the hierarchy. As a result, work behaviors like maximizing billable hours, being efficient, and focusing on client work would be expected.
2. Impact of Salary Increase for New Associates
If the salaries for new associates were increased by $20,000, the pay for associates in other levels should also reflect that increase to maintain internal equity. One possible recommendation could be to raise salaries for all associates by an incremental percentage, ensuring that higher-level associates see a proportionate increase. This would keep the relationship between pay and tenure intact while helping avoid potential resentment among current associates who feel underpaid compared to newcomers. The firm could adjust salaries in increments for the different associate levels (e.g., $20,000 to $30,000 for mid-level associates, and smaller increases for higher-level associates). Such changes would ensure fairness and competitiveness while maintaining internal consistency.
3. Comparison Between Partners and Associates
The Wall Street Journal’s analysis of law firms as “giant pyramids” misses key considerations about the differing roles and responsibilities between associates and partners. Partners, who earn significantly more than associates, perform higher-level tasks such as managing client relationships, handling more complex legal matters, and contributing to firm strategy. They also take on greater risk and share in the profits of the firm. In contrast, associates typically focus on more routine legal tasks and billable hours. The disparity in pay reflects the difference in the nature of the work, expertise, and contribution to firm revenue. A similar situation can be seen in firms like Merrill Lynch, where Financial Advisors (FAs) and Senior Vice Presidents (SVPIs) differ in their roles and responsibilities, leading to different compensation structures based on expertise, leadership, and client relationship management.
4. Sullivan & Cromwell’s Bonus Cuts and Recruitment/Retention Concerns
Sullivan & Cromwell’s decision to cut year-end bonuses might pose a risk to its recruitment and retention strategies, particularly if competitors are offering more lucrative bonuses or other incentives. The drastic reduction in bonuses—down to as low as $1,000—could signal to associates that the firm is struggling financially or devaluing their contributions. This can reduce motivation, leading to potential turnover. Given the competitive nature of the legal industry, firms with more attractive compensation packages could lure away talent, making it more difficult for Sullivan & Cromwell to retain top performers.
5. Differences in Compensation Approaches: Sullivan & Cromwell vs. Dewey & LeBoeuf
Sullivan & Cromwell’s compensation model is more conservative and traditional, relying on a lock-step approach with annual increases based on seniority and performance. It maintains a clear, stable structure where the pay is predictable and associates are promoted through the levels based on performance and tenure.
In contrast, Dewey & LeBoeuf pursued an aggressive growth strategy with significant investments in recruiting top talent, including offering high multiyear guaranteed pay packages to lure attorneys from other firms. This led to high fixed compensation costs, which became unsustainable when demand for legal services decreased. The Dewey model favored rapid growth and external talent acquisition but lacked the long-term stability provided by the lock-step system. The disadvantage of this model became evident when business slowed, leading to financial strain and eventual bankruptcy.
The advantages of Sullivan & Cromwell’s approach include financial stability and a well-defined career progression, while Dewey & LeBoeuf’s model, though offering high pay, was vulnerable to external market shifts and created financial strain when the business environment deteriorated.