Major UK law firms battling one another over salaries are taking a risk that higher costs hamper expansion plans and impede their ability to compete with US rivals.
Linklaters last week boosted salaries 20% for newly-qualified lawyers after a similar move by Freshfields Bruckhaus Deringer earlier this month. Those attorneys will now earn £150,000 ($188,000), up from £125,000 ($157,000).
“For a UK law firm to do this in a market, where it’s just harder to make money, that’s a hell of a statement,” said Scott Gibson, director of London-based legal consultancy Edwards Gibson. “It’s going to cost them.”
Bumping up salaries of newly-qualified attorneys—the London equivalent of a first-year associate—adds to stresses of top UK firms that are already spending on their expansion aspirations during a slow period for the transaction work that typically fuels their bottom lines.
The firms have already been grappling with increased competition from US rivals, who flooded the London market and took business over the past decade. UK firms have also had to wrestle with issues such as Brexit and a lower value of the pound versus the dollar.
As a result the five Magic Circle firms—Allen & Overy, Clifford Chance, Freshfields, Linklaters, and Slaughter and May—have lost their place at the top of the London legal market they held a decade ago.
The Freshfields and Linklaters increases help them close the gap with the US law firm payscale, which starts at $225,000 for first-year associates. The increases mean the London firms pay about 12% to 15% less than US operations, an improvement from a previous gap of 35% to 40%, said Ria Karnik, a London-based legal recruiter for Major, Lindsey & Africa.
As is the case among US firms, the first-year pay rate is often used as a proxy for quality of the law firm, Gibson said. Right now, there isn’t a marketplace for such lawyers, so firms are subsidizing that rate, he said.
“They don’t really need to do this,” Gibson said. “It can only really be for prestige.”
UK Pressure
US firms Sidley Austin, Paul Hastings, and Ropes & Gray in January announced pay raises for their newly-qualified lawyers to bring them in line with the Cravath scale, which elite law firms adhere to for compensating associates.
US litigation powerhouse Quinn Emanuel earlier this month added to the pressure on UK firms by saying it would boost its starting salaries from £152,000 to £180,000 in London.
The Freshfields and Linklaters increases are “a bold move, and I think it really exemplifies the impact of the US firms in London,” Karnik said. “It’s reasonable to expect the other Magic Circle firms to follow suit.”
For US firms, salary increases can be offset by scale and rate increases. “It’s just easier to make money in the American marketplace because clients will bear higher rates,” Gibson said.
For UK firms, the salary increases “probably makes for some difficult conversations around the partnership compensation table,” said David von Dadelszen, director at Jameson Legal. “This must leak into partner profits and eat into—or increase—client fees.”
The increases also will likely pressure the UK firms to raise salaries of more senior attorneys. Associate lockstep is less defined than it used to be, and once lawyers are in the law firms, their compensation doesn’t really go up very much, Gibson said.
“You can’t have a newly qualified lawyer being paid £150,000 and have a fourth-year make £160,000—it just doesn’t work,” said Chris Clark, director of London-based Definitum Search. Firms could raise bonuses for more senior lawyers rather than boost salaries, though that would be “a headache” because established bonus structures would have to be changed, he said.
While top Magic Circle firms are expected to match the Freshfields and Linklaters increases, the boosts “will continue to polarize the market,” Karnik said. It is unlikely that rivals in the top 20 firms will match the rates, she said.
“Firms that do not want to engage in the salary wars need to be clear about their value proposition and what makes them different from the firms paying at the top of the scale,” Karnik said.
US Focus
It has been a transformational time for the Magic Circle.
London’s Allen & Overy as of this month adopted the new name of A&O Shearman, thanks to its completed merger with New York’s Shearman & Sterling. The merger creates the world’s fourth-largest law firm, with $3.5 billion in annual revenue and 4,000 lawyers, and it gives A&O direct access to the US market.
Freshfields has been on hiring spree in the US over the last couple of years in a bid to grow that overseas market. Last month the firm hired Denny Kwon from Covington & Burling for its corporate and mergers and acquisitions practice in Silicon Valley. In March, it added two partners to its New York operation.
“Freshfields is trying to break away from being a Magic Circle law firm, and it’s trying to be a global elite firm,” Gibson said, referring to the pay increases.
But not all firms are positioned equally. Linklaters has lost 12 partners to competitor law firms in London over the last year. It was also reported earlier this year that the firm was considering changing its compensation structure to enable it to withhold distributions for partners that leave for rival firms.
These salary hikes are going to go straight into fixed costs for the firm, and they comes at a time when Linklaters is looking to hire in the US, Gibson said. “That’s going to make it pretty tough for them, and there is a risk they’ll lose more people, potentially,” he said.
But even as UK firms increase their salaries, their US counterparts might try and keep their edge.
“I don’t think it’ll be long before the US firms come out and just raise” their salaries again,” Clark said. “They like to normally have about 30% to 40% difference in the entry points and now, that’s getting slimmer.”
