Nov. 25 (Bloomberg) -- Salaried lawyers at top New York law firms last year got bonuses of as much as $115,000. This year they may only get a quarter of that.

Cravath, Swaine & Moore, the second-most-profitable U.S. law firm and one of the pace-setters for the top tier, opened the bonus season last week, awarding some associates 27 percent of what they got in 2007. This year’s bonuses range from $17,500 to $30,000, depending on individuals’ experience. That’s down from last year’s $45,000 to $110,000, or as much as a 73 percent drop.

Simpson Thacher & Bartlett yesterday followed Cravath’s lead, announcing maximum payouts of $32,500 compared with $115,000 in 2007, a 72 percent difference. Chairman Philip “Pete” Ruegger cited “the current challenging business environment” in a memo to the firm’s salaried lawyers. “Expect other firms to follow suit,” said Andrew Johnman, head of Barclays Plc’s U.S. professional services team, which lends to law firms.

The most-profitable U.S. firms, which rely heavily on business from financial institutions, are struggling as some clients go bankrupt, get bought out or receive government bailouts. Deal work is down 36 percent this year, according to data compiled by Bloomberg, and litigation and bankruptcy work hasn’t caught up, said Ward Bower, a principal at the legal consulting firm Altman Weil.

Year-end bonuses last year accounted for 22 percent of the total pay of beginning attorneys at some firms. Partners don’t get bonuses, sharing in the firm’s profits with regular distributions during the year followed by the biggest payout after the books are closed, according to Johnman.

‘Train Wreck’

This year has “been a train wreck for a lot of firms,” Bower said. “New York firms have been hit the hardest. I’ve had two conversations with managing partners this morning, and both are going to pay bonuses, but only a fraction of what they’ve done in the past.”

One of Johnman’s clients, a New York firm he declined to name, told him last week it would follow New York-based Cravath’s lead and trim bonus pay. Other firms may give the same amount as last year, typically $35,000 to $60,000, he said. With amounts linked to hours billed, lawyers are unlikely to hit their target this year, Johnman said.

The legal industry, including nonlawyer support staff, has lost 16,800 jobs since May 2007, according to U.S. Bureau of Labor Statistics data.

Fired Attorneys

Law firms that have fired attorneys include New York’s Cadwalader, Wickersham & Taft, White & Case and Dewey & LeBoeuf.

London-based Clifford Chance also thinned its ranks, as did Chicago-based Sonnenschein, Nath & Rosenthal, Katten Muchin Rosenman and Mayer Brown; and Squire, Sanders & Dempsey in Cleveland.

At least two San Francisco-based firms, Heller Ehrman and Thelen, shut down this fall from a lack of work.

“There’s a resignation now that this downturn is more than just a hiccup,” Johnman said. “The redundancies and layoffs we’ve seen so far is only the start.”

Cravath is cutting bonuses as its clients face “unprecedented conditions” because of the financial crisis, presiding partner Evan Chesler said last week in an interview.

Chesler told attorneys in a Nov. 20 memo the firm “will not be able to address the issue of whether there will be any year- end bonuses in 2009 until this time next year.”

In The Past

Cravath’s profit and revenue will be less than in the past two years, which saw record partner payout at the top firms, Chesler wrote. “As a result of the deterioration of the business environment, the firm’s financial performance in 2008 will not be in line with” 2006 and 2007, he wrote.

Even in a recession, Cravath wanted to reward its lawyers so to remain competitive in recruiting and retaining talent, Chesler said.

Law firms are also concerned over timely bill-paying. If money doesn’t arrive by year’s end, it can’t be paid to partners or used for associate bonuses for this year. Most firms collect about 25 percent of their revenue in November and December, Johnman said.

“In October, November and December, the partners have a concerted effort to collect the bills they’ve put out all year, because that will dictate how much they get paid that year,” Johnman said. “This year, there is a fear that it won’t work that way.”

Half the level

So far, November collections at some firms have been half the level of last year, said Bower, the Altman Weil consultant, who’s based in Newtown Square, Pennsylvania.

“I’ve been on the phone with managing partners across the nation,” he said. “Clients are calling me in a panic. If they’re going to be off 50 percent of what they’ve usually been, that’s a potential disaster.”

Bonuses will reflect the year’s success for law firms, said Dan DiPietro, head of client relations for the law firm group at Citi Private Bank in New York, a unit of Citigroup Inc.

“My strong advice to firms is to roll back bonuses,” DiPietro said.

Skadden, Arps, Slate, Meagher & Flom, another New York firm, followed that advice. It opened the 2008 bonus season Nov. 19 by awarding its salaried lawyers the same bonus it gave last year, without a so-called special bonus. Skadden, which declined to disclose the bonus amounts, and Cravath both pay first-year associates $160,000.

At most top-tier firms last year, end-of-year awards ranged from $35,000 to $60,000 plus additional special bonuses of $10,000 to $50,000.

Cravath had profit per partner of $3.3 million in 2007, according to the American Lawyer, a trade magazine. The firm’s clients include International Business Machines Corp., Bristol- Myers Squibb Co., Credit Suisse Group, Time Warner Inc., Vivendi and Xerox Corp.

New York’s Wachtell, Lipton was the most profitable firm, with partners making $4.9 million on average.

To contact the reporter on this story: Lindsay Fortado in New York at lfortado@bloomberg.net.

Last Updated: November 25, 2008 18:31 EST