After several years of belt tightening, high-paid lawyers and investment bankers at major Wall Street firms are expected to see bonuses increase 10 percent to15 percent over last year.
In Los Angeles, where many professionals provide services to smaller companies, bonuses could be a bit stingier, in the 5 percent to 10 percent range, according to a sampling of executives and compensation experts. But that comes off even tighter payouts a year ago.
When times are tough, executives who make the critical decisions about how bonuses are doled out tend to focus more on individual performance. In headier times, bonuses tend to be spread more broadly among staff.
That was the case several years ago, when a surging stock market fueled not only bonuses but rapid increases in base salaries, as law firms and financial services employers raised the ante to recruit and retain key employees.
But with the dot-com bust in 2000, the situation reversed. For the past year or two, the economy has generally improved, but at an uneven pace.
This year on Wall Street, equity traders and wealth managers are likely to see smaller bonuses because the stock market has moved sideways, while professionals involved in high-yield debt will reap bigger rewards.
Bonuses typically are based on a loose formula that takes into account a company's overall sales and profits, the strength of specific divisions and individual performance. There also are wide variations on the frequency of bonuses, with some professionals paid quarterly or twice a year.
At investment banks, bonuses can total anywhere from 20 percent to 300 percent of base income, which is why one Los Angeles investment banker called them "a radioactive topic."
At the junior level, an analyst can expect a bonus equal to roughly 50 percent of his base salary. Higher up the ladder, a managing director might have 80 percent of their overall compensation tied to the year-end bonus.
Peter LeBlanc, senior vice president at employee consultant Sibson Consulting, said new MBA hires are earning about $75,000 a year, while law firm partners typically take home roughly $300,000 in base salary.
In the legal profession, performance remains the driver, with the highest-paid attorneys often pocketing as much as 30 percent of the total bonus pool at their firms. "These are high-paying occupations so when revenue is up, the rainmakers will get larger payments," said LeBlanc. "Firm performance drives the pool and that pool then gets distributed based on individual achievement."
With profits up, law firms are raising bonuses rather than salaries, a sea change from the generous dole-outs of 1999 and 2000, when law firms raised salaries as much as 50 percent annually.
"This year the pressure will shift to bonuses," said Edward Poll, president of LawBiz Management Co., a coaching and consulting firm for lawyers. "They're not going to increase salaries like they had in past years when Silicon Valley was so hot."
At law firms, only associates receive bonuses. Partners get a pre-determined share of the firm's net profits, after overhead costs such as real estate leases, salaries and bonuses are subtracted out.
Most partners give out bonuses in December, even though they may not calculate year-end revenues until late January or early February. Bonuses typically are based on how much revenue the firm is expected to generate that year and an associate's seniority and merit, such as how many hours were billed.
Sullivan & Cromwell LLP in New York was one of the first law firms to announce its payouts this year, raising first-year associate bonuses 14 percent to $20,000. That move, which affects the firm's office in Los Angeles, could raise the stakes at competing firms.
In Los Angeles, only a handful of law firms paid an average bonus of more than $20,000 last year, according to the American Lawyer magazine's annual midlevel associates survey, published in October.
Gibson Dunn & Crutcher LLP was one of the few firms that gave an average bonus higher than 14 percent of salaries: about $24,000, which was 16 percent of the average associate salary. By contrast, Latham & Watkins LLP, the local firm with the highest revenue, doled out bonuses that were 10 percent of salaries, or about $15,800, on average.
Still, bonuses offer more leverage than do salaries, which are locked in at the beginning of the year, said Michael Waldorf, president of attorney placement firm Waldorf Associates Inc. "It's an expected cost," he said. "If the business is doing well, they have to pay more for their labor."
Though it's only a middling year for lawyers and bankers, they're doing better than the average salaried employees. These workers will receive a 3.6 percent annual pay increase in the coming year, barely keeping pace with inflation, according to a study by Sibson Consulting called "The Rewards of Work," which analyzes how companies can attract and retain talented employees.
"The average worker does not qualify for a big bonus so their whole life is based on overtime or an annual pay increase, which tends to be very small," said LeBlanc. "Most employees are just treading water."
The study also found that as the economy improves, top performers tend to leave companies. That typically results in a "war for talent," with firms competing against each other. Whether that will heat up next year given an upturn is an open question.
"It's been a slow market over the past 15 months but for professional service firms so now the outlook is brighter than it has been in several years," said LeBlanc.
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