The Case for Bonuses

Pic: Sweet Awesome Tours

Last week we mentioned in passing the possibility of bonuses:

Still, there’s certainly reason for those who have survived this brutal year to believe that they’ll get a little something extra for the effort this year. At Law Shucks, we’re counting on two factors outweighing (if not at least counterbalancing) the rough year for firms: bonuses would be a strong signal that the firms have kept the people they really want, and want them to stay; and the S&P 500 is up 14% year-to-date, even after this crappy week (S&P down 4%). While we’ve said all along that even though most of the profit this year has come from the expense side, those are still good results for clients (and even better counting from the March lows).

That was based on earlier reports that DLA Piper had announced that something would be paid and Slaughter & May’s announcement of five percent bonuses.

Since then, Cravath announced its bonuses and that opened the floodgates for the naysayers.

After the jump, we rebut and make the case for bonuses.

We were actually pretty surprised by the negativity following the announcement. Much of it goes back to a New York Law Journal piece, which reported

The head of one major New York law firm, who requested anonymity, said he was “quite honestly surprised that a major New York firm was paying bonuses this year.”

The partner said he would expect a negative reaction from clients on “any bonuses being paid in the current economy.” He said he expected that a decision to pay bonuses “would have been deferred for some number of months.”

Cravath doesn’t exactly have clean hands, with stealth layoffs of 25 lawyers reported back in June (which was actually pretty late in the year for something like that to come out). But that’s all the more reason for bonuses.

Morale is at an all-time low right now. Whether a firm has laid anyone off or not, retained associates are constantly struggling with the fear that the next layoff is just around the corner. The key message firms have to get across to their retained associates is that they have been retained for good reasons – the firm values them and wants to keep them. It’s not enough to be quiet right now and rely on the abysmal market conditions to serve as a retention program.

Bonuses, frankly, go a long way toward buying back some of the goodwill that was lost – even more so for goodwill lost to stealth layoffs, which we think are even worse than being forthright about market factors and tough choices.

Bonuses also signal that the firm is healthy and doing well enough to pay them, which not only improves morale but preempts potential defection of the most-valued, yet disgruntled, attorneys who do happen to have options.

Retained associates are also working pretty hard right now. First, they’ve had to pick up whatever work was left by their laid-off former colleagues, which is never pleasant. No matter how little it is, it’s always difficult to step in the middle of someone else’s deal and add it to your own workload. Second, work is picking up right now. Take a look at what Cravath has been retained on recently:

• $44 billion sale of Burlington Northern railroad to Berkshire Hathaway;
• $643 million sale of Nuvox to Windstream;
• $4.5 billion acquisition of Black & Decker by Stanley Works;
• CBS as a selling shareholder in National Amusements’ $312 million offering;
• Unilever’s sale of part of its stake in JohnsonDiversey;
• $341 million acquisition of Buscape by Naspers in Brazil; and
• $8.4 billion sale of ACS to Xerox.

That’s all since Labor Day and doesn’t include any of the litigation.

So when you’re exhorting your people to “do more with less,” you’d be well served to show your appreciation.

The other factor to consider is that on the whole this is going to be a very good year for many clients. As we mentioned, the S&P is up more than 14% for the year. While we don’t think the numbers are particularly bright in the long-term (again, the profit is almost entirely from costcutting, not from revenue growth), those are still very impressive results. How much worse for morale will it be for people to look around and see how well their clients did (whatever the reason) and not get to wet their beaks a little? And how are they going to feel when they see Wall Street bonuses up 40%?

“I must of course be sensitive to the views of many stakeholders that bankers are paid too much,” said John Varley, Barclays PLC chief executive, in a speech this week. Still, “our shareholders and our customers expect Barclays to field the best people we can.”

“Our objective is to pay the minimum compensation consistent with competitiveness,” Mr. Varley said.

Paying the bonuses is, as always, a further investment in keeping the people firms want to keep.

Don’t get us wrong, we’re actually not in favor of bonuses most years. Prior to 2000, they were almost unheard of, then firms got carried away, overreacting as they usually do when it comes to these things. No bonuses should have been paid at all in 2001 (although that year there may have been a similar imperative to pay one for morale purposes), 2002, 2005, 2007, or last year. Those were just flat out bad years. We’ll save our screed on the sense of entitlement that quickly set in for another day.

This year is different. This year bonuses should be paid because the firms have some serious fences to mend.

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