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Understanding the City law firm pay war of 2014

17 June 2014 

Understanding the City law firm pay war of 2014

Firms' jostling for position over trainee and associate pay recalls pre-recession legal market: but this time around expect more restraint.

Earlier this month Clifford Chance (CC) became the fourth and final Magic Circle law firm to raise its trainee and junior lawyer salaries. With Allen & Overy opting not to increase pay, CC's rise puts it alongside Freshfields Bruckhaus Deringer at the top of the magic circle pay scale. First year trainees at CC now get £40,500 (up from £39,000), with second years on £45,500 (up from £44,000) and newly-qualified (NQ) solicitors receiving £67,500 (up from £63,500). The biggest rises, however, have taken place at junior associate level, with one-year post-qualification experience (PQE) wages rising from £69,500 to £72,500, second-year PQE going up from £78,200 to £84,000 and third year PQE increasing from £87,000 to £93,500. The rises nudge the Magic Circle towards the huge salaries handed out by the London offices of US firms, which pay as much as £50,000 to first year trainees and £100,000 to NQs. When bonuses are taken into account, associates at these outfits can earn figures approaching £150,000.

What is unusual about the peak £100,000 benchmark is that it was achieved during the height of the recession in 2010. It was a period which saw a host of US firms take advantage of some UK firms' difficulties and expand aggressively in London. The financial might of big-paying US giants like Sullivan & Cromwell and Bingham McCutchen, allied to the strength of the dollar relative to Sterling at the time, enabled them to buck the market and raise pay to entice the UK’s top graduates. Useful publicity-grabbing headlines ensued. But with corporate transaction volumes fairly low and a plentiful pool of law graduates to choose from, top UK law firms were able to largely behave as if the US firms' salary rises had never happened. Enough of the best graduates kept coming. The US challengers were, after all, mostly only taking on a handful of London trainees a year – typically between 5-10, a figure dwarfed by the average annual individual Magic Circle firm intake of 100.

So this year's round of pay rises by the nation's top law firms has been significant, in that it indicates that an anxiety about missing out on new talent is creeping back into the market. And in the current talk of how to ‘ensure the brightest and the best within firms do not go elsewhere’ – the words of Slaughter and May Graduate Recruitment Partner Robert Byk, in an interview last week with Legal Week – memories of the pre-recession noughties are being evoked.

2000-2008 was an incredible time for City law firms. In under a decade ago trainee wages went from  roughly equivalent to the sums earned by rookie doctors and teachers – around the £30,000-£35,000 mark – to baby banker levels amid a torrent of deals that required England and Wales-trained lawyers. Salaries were further pushed up by the arrival of growing numbers of US law firms in London (whose higher pay rates reflect greater levels of US law school debt and the absence of the training contract system in America). Meanwhile, the ever more powerful influence of the internet was destroying the traditional secrecy that had prevailed over City law remuneration. On online discussion boards such as RollOnFriday in the UK and Greedy Associate in US, lawyers began telling each other what they earned. Pretty soon pay transparency was the norm, putting even more pressure on lawyer wages. This perfect storm fed a media narrative of spiralling salaries, with barely a week going by without news of the lastest pay gimmick by a corporate law firm. When the wheels came off in 2008, the hangover was, unsurprisingly, pretty huge.

At last, though, it seems to be lifting. Still, what comes next is not easy to predict. With firms such as Hogan Lovells and Herbert Smith Freehills also upping their junior lawyer pay this year, there  is evidence that the increased remuneration is spreading. And, indeed, with the wider UK economy showing clear signs of genuine recovery, it's a safe bet to expect more firms to follow. By sitting on their hands, they risk missing out on the best graduates – and losing prestige: trainee and junior lawyer salaries are one of the most symbolic measures of corporate law firms' health and status.

On the other hand, a re-run of the extreme noughties pay war looks unlikely. This time around, experts anticipate greater emphasis to be placed on merit-based pay to attract and retain top performers.  Iain Millard, manager at the London office of legal profession recruitment agency Chadwick Nott, recently told Legal Cheek that newly qualified remuneration is more complicated than it used to be. ‘Salary freezes in the City are definitely thawing,’ he said, before highlighting the fact that a number of firms have reviewed their remuneration systems over the last few years ‘with the aim of moving away from the traditional system of applying prescriptive salary bands’. Millard continued: ‘They are moving to more merit-based systems with a bonus element playing a more important role.’

 At the same time, the pressure to do more for less to which City law firms have been subjected during the recession is unlikely to abate. Since 2008 clients have grown accustomed to fixed fee deals where lower value legal work is outsourced to third party providers or to lawyers in lower-cost offices outside London. This model works well and there is no reason to change it.

Rather, these regional offices will probably become host to the next battle in the law firm pay wars, taking the heat off London for a while. As with house prices, the differential between corporate law salaries in London and outside it is currently at historically high levels. The Magic Circle's latest round of increases mean their lawyers receive almost double the amount of their counterparts at the regional offices of national firms. On current patterns, the next group of firms due to increase pay are the big global-national players like Pinsent Masons and DLA Piper which have large networks of regional offices as well as major presences in the capital. If they raise London pay, as they could find themselves under pressure to do quite soon, they will probably have to enact proportional increases in the regions. At which point the pay war could swiftly go national.


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