Marco Cillario assesses the City-wide implications of Freshfields’ decision to dramatically hike associate salaries
A decade after leading the way in resetting downwards the going rate for City associates, Freshfields Bruckhaus Deringer in May set a new standard for Magic Circle firms, raising its newly-qualified (NQ) salaries from £85,000 including bonuses to a symbolic £100,000, with bonuses on top.
The move echoes the late-1990s/early-2000s associate pay wars, which saw NQ rates relentlessly increase to around £66,000, before Freshfields reset the scale to £60,000 in early 2009 as the banking crisis was reaching its full, market-shaking intensity.
Since then, underlying pay scales have either been frozen or seen relatively modest rises, even as US firms have made starting packages far north of £100,000 increasingly common. That is until the Freshfields’ announcement on 7 May. ‘It raised a lot of eyebrows; it’s a big investment,’ says the head of corporate at a Magic Circle rival, of a move that is projected to cost Freshfields well over £10m a year.
Freshfields had been reported for months to be considering substantive changes to associate pay amid mounting concern at the increasingly intense competition for talent from US rivals. If Kirkland & Ellis can recruit private equity stars like David Higgins and Adrian Maguire, it becomes doubly important for Freshfields to retain its best senior associates to replenish partner ranks. For context, Kirkland is currently offering its NQs £143,000, alongside a much faster partnership track.
But the impact of the move spans well beyond Fleet Street. As Legal Business went to press Clifford Chance (CC) was finalising a move to bring its own NQ rates from £91,000 including bonuses to the same level as Freshfields. And as one of Linklaters’ high-profile M&A partners notes, it is very hard to imagine associates at Silk Street not being handed comparable compensation this year (though in late May Linklaters said there was no announcement pending). The bottom line is that the other four Magic Circle outfits are all expected to come up with similar increases by the autumn.
Linklaters, Allen & Overy and Slaughter and May all pay NQs £83,000, a figure which rises to £86,000 after six months at Slaughters.
The key question is how they will absorb the cost. All of the possible answers bring more challenges for the UK elite. One short-term solution would be to increase lawyer/equity partner leverage, packing more associates on mandates and charging out more, while reducing partner time. But at a time of increasing pressure on fees, especially on mid-market work, that is a hard message to take to clients.
The bottom line is that other Magic Circle outfits are expected to come up with similar increases by the autumn.
A move towards smaller intakes of associates looks like the more sustainable medium-term response. This suggests the City elite is opting for more outsourcing to regional firms, greater use of in-house low-cost centres and technology for due diligence and other lower-value tasks. This approach also requires City firms to further narrow their target practices and turn away more low-margin matters.
The real debate will be if high compensation will come with yet more expectations of US-style billing targets at a time when some believe young lawyers are less ready to accept the long-hours mantra that once went unchallenged.
‘Partners are not going to see their drawings reduced because of this,’ says the aforementioned Magic Circle head of corporate. ‘They are going to find ways to sweat more out of associates by setting very high billing targets.’
Making things more complicated is the fact that Magic Circle firms have recently tried to move away from formal targets in favour of a more flexible associate appraisal system. For example, a few days before Freshfields’ announcement, CC launched a one-year trial to drop the 1,800-billable hour target for 65 associates and counsel in its Dubai and Abu Dhabi branches, ahead of a possible firm-wide roll-out.
While conceding that his shop is likely to be forced to follow suit shortly, a partner at a Magic Circle rival notes that Freshfields’ move is a setback for those who argued the City elite should move in the opposite direction, offering young lawyers a better work-life balance: ‘Young people say they want more than just being sweated to death. We hoped that the direction of travel will be away from the US model towards our model, where people work hard, do good work but have a good [work-life] balance. This is moving in the other direction and that’s regrettable.’
Meanwhile, observers are far from certain that it will achieve the hoped results. Despite the latest increase, US firms’ rates remain well ahead, and not just at Kirkland: a number of other US firms, from Latham & Watkins to Sidley Austin, have adopted Cravath, Swaine & Moore’s market-setting NQ rates of $190,000.
The case for the move is that a US/UK gap is sustainable, providing it is not too wide, and Freshfields has arguably got the gap back to a credible range.
Magic Circle partners still insist junior lawyers get ‘much better experience and training, and superior access to deals’ compared to the City arms of US firms. But one partner concedes that the appeal becomes less obvious as associates get more senior, especially in areas that US firms’ major in, like private equity and global investigations. And in truth, a decade of investment at major US firms in London means they are able to offer a range of training and experience that has at least closed the gap with that on offer at the Magic Circle.
As in so many aspects of their model, elite City firms are facing a potent challenge from key US rivals. The pressure to come up with a comprehensive response across their entire business is only building.