The Firms

December 10, 2008 12:06 PM

Bonus Memos Hint at Firm Finances

Posted by Nate Raymond

Correction: An earlier version of this story referred to Thacher Proffitt's bonus memo as going to associates. It was for non-legal staff.

Want an early look at how law firms will end 2008? Check out their associate bonus memos.

Of the 14 firms whose memos have made it onto the blogosphere, all but one in some way refer to the economy or firm finances in explaining why bonuses are down this year. And while it's impossible to quantify profit losses off of adjectives, a picture emerges that isn't too cheery.

Take Debevoise & Plimpton, which in 2007 saw revenue grow 23.4 percent and profits per partner soar 26.9 percent to $2.29 million. The memo its associates received Tuesday notes deal work in 2008 has dropped, suggesting the firm is bracing for weaker results.

"We have seen in 2008 large projects of extraordinary importance to clients and market dislocations that have chilled deals and challenged many of our clients," managing partner Rick Evans wrote. "Continued success in the uncertain economic environment of 2009 will require the superior client service and commitment that our clients have come to expect."

Much of the bonus attention has focused on Skadden, Arps, Slate, Meagher & Flom and Cravath, Swaine & Moore, since they were the first two firms to pull the trigger on bonus announcements. Both memos suggest different impacts on the firm. Skadden, diversified internationally, says of 2008, "the level of the firm's business continues to be relatively strong, with our total workload, until very recently, being similar to 2007, our most successful year."

"However, we have more attorneys to do this work, and therefore, our results aren't as strong as they were last year," the memo from executive partner Robert Sheehan said. Skadden in 2007 grossed $2.17 billion and posted per partner profits of $2.28 million

Cravath presiding partner Evan Chesler, in contrast, writes that "the economic downturn has severely affected our clients," who "are under strong pressure to cut costs dramatically."

"As a result of the deterioration of the business environment, the firm's financial performance in 2008 will not be in line with" the last two years, Chesler wrote. Cravath grossed $610.5 million in 2007, and partners on average took home $3.3 million.

It's a message echoed in other memos. Schulte Roth & Zabel, whose clients include a roster of hedge funds, likely won't see the same growth it saw in 2007, when revenue totaled $419.5 million and profits per partner hit nearly $2.36 million. The memo distributed to associates on Tuesday noted that 2008 "has been a challenging economic environment for the firm and its clients."

"We look forward to working together in 2009 as we continue to serve our clients in the face of the unprecedented business and financial situation that we all now confront," the memo said.

The word "recession" is mentioned in no memo, which were either found on the blog Above the Law or had been obtained by The Am Law Daily. Instead firms are euphemistic about what's happening in the economy. Willkie Farr & Gallagher simply refers to "these challenging times" for why it is cutting bonuses. Cleary Gottlieb Steen & Hamilton thanks associates for their "ability to adapt to the rapidly changing legal landscape presented by current global economic conditions."

Davis Polk & Wardwell, Milbank Tweed Hadley McCloy, and Simpson Thacher & Bartlett all refer to the market, in three words, as a "challenging business environment."

White & Case gets around the problem by not mentioning finances or the economy at all. (Spokesman Nicholas Clarke, though, says "we believe our associate bonuses this year are competitive with the broader market and our peer group and in line with the current economy.")

A few firms seem positive about how they will finish 2008. No hint of a recession comes from the bonus language in Paul, Weiss, Rifkind, Wharton & Garrison's Tuesday memo, which thanked associates "for your important role in helping accomplish the extraordinary results we achieved for our clients this past year." Does that mean Paul Weiss will be able to top its $651 million gross and $2.595 million per partner profits of 2007?

Likewise, Dewey & LeBoeuf, in its first full year as a merged firm, thanked associates and counsel for contributing to its "strong performance in 2008...a year marked by great economic uncertainties across the globe and unprecedented turmoil in worldwide financial markets." Looking ahead, though, the market poses a "tough economic environment," the December 3 memo said.

"As we look ahead to the difficult business conditions in 2009, we will once again rely heavily on the hard work and steadfast commitment of our associates to provide world-class service for our clients and instill our firm's culture and values throughout our organization," the memo noted.

Two memos are more foreboding than others, those of Epstein Becker & Green and Thacher Proffitt & Wood. Thacher Proffitt will not award bonuses to staff, and Epstein isn't giving bonuses to associates, requiring partners to explain the decisions. Epstein Becker's memo said the firm's "financial condition in these challenging times remains steady and sound." (Epstein Becker grossed $203.5 million in 2007, up 8 percent; profits per partner climbed 12.8 percent to $670,886.)

"We, like all law firms in 2008, are experiencing a slower pace of payments to the firm from our clients than in prior years," chairman Doug Hastings wrote. "While we are confident that these monies will be collected over time and we are well positioned for 2009, cash available at year end is, as a consequence, more limited than it has been in years when the economy was stronger."

Thacher Proffitt has struggled under the downturn in the capital markets. Chairman Paul Tvetenstrand explained in a December 1 memo that "the past year has posed many challenges for the firm given the downturn in the economic climate which has affected our clients and ultimately the firm."

"Unfortunately given this continuing downturn the firm will not be able to pay any bonuses or year end service awards this year," he wrote. "We truly appreciate the contributions each of you has made in these trying times and we wish we were able to recognize each of you as you deserve."

Thacher Proffitt grossed $194.5 million in 2007, up only 1.6 percent. Profits per partner last year dropped 22.1 percent to $1.02 million.

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