Bonus babies

NEARLY eight years have passed since young lawyers at large American firms last got significant pay rises. With law-school graduates plentiful and demand for corporate legal work tepid, the standard starting salary has been stuck at $160,000 a year since 2007. Heartbreaking, isn’t it? But in the past month an unexpected financial arms race has erupted over year-end bonuses. It seems that associates (junior attorneys) are at last in a position to extract a greater share of the profits they produce for their bosses, the partners.

Unlike on Wall Street, legal bonuses have not generated much drama in recent years. What usually happens is that in early December Cravath, a big New York outfit, announces its payouts, then every firm that considers itself a peer matches them. However, on November 21st Simpson Thacher, which in 2007 had been the first firm to offer $160,000 starting salaries, jumped the gun. After a banner year in which it represented Alibaba, a Chinese e-commerce giant, in the largest stockmarket flotation yet seen, Simpson declared the biggest bonuses since the financial crisis. Associates in their first year will get $15,000 (50% more than in 2013). Ones with seven years’ experience will get a whopping $100,000, double last year’s sum.

Most of Simpson’s competitors promptly matched its scale. But four days later Davis Polk—a genteel firm hitherto averse to bidding wars—raised the ante with an extra $5,000-$10,000 for mid-tier associates. That forced Cravath and the rest to follow suit.

The bonuses reflect improving fundamentals: there has been a surge in mergers and acquisitions, a big source of legal work. And rising stockmarkets have encouraged hedge funds and private-equity outfits to compete with law firms for experienced legal talent.

But the form these payouts have taken also reflects the precariousness of the industry’s recovery. Elite firms may be minting money now, but they face a highly uncertain future. Even after this year’s boost, bonuses for first-years are just a third of what they got in 2007. That reflects their declining value: clients who once subsidised junior associates’ on-the-job training now refuse to pay up for rote work that can be automated or outsourced.

Moreover, big clients that typically used to be loyal to one firm now force lawyers to bid against each other for work. A senior partner at one firm that reluctantly matched Davis Polk’s bonuses, cutting its profits by 4%, says furious clients have been inquiring why their exorbitant fees are funding associates’ Christmas shopping sprees—a thinly veiled threat to take their business elsewhere.

As a result, though firms are happy to dispense beefy bonuses, they still refuse to raise base salaries, which would be harder to cut in a downturn. By embracing variable compensation, they are emulating many of their clients on Wall Street. But junior bankers do not have to attend costly graduate school, like legal associates, who thus need steady incomes to service their debt. When the bonuses arrive, young lawyers may be too busy popping champagne corks to realise it, but their bosses are shifting onto them a greater share of the risk in an industry on the brink of disruption.