The war for junior talent at the top end of London’s legal market entered a new phase of brinkmanship this year, as firms jostled for position after Allen & Overy (A&O)’s decision to freeze its associate rates.
A&O froze its newly-qualified (NQ) salaries in late June, citing a ‘more challenging business environment’. The firm typically reviews pay later in the year, but A&O decided to bring the decision forward.
A firm spokesperson said: ‘After careful consideration and consultation we have decided not to increase the London NQ salary at this time. It was last increased in November 2021, to £107,500. This is a prudent decision based on a number of factors, including the more challenging business environment. We will keep the situation under review.’
A&O currently matches Linklaters’ £107,500 NQ salary, with both firms at the bottom end of the Magic Circle’s remuneration. Clifford Chance (CC), on the other hand, announced in May that it would be hiking its NQ pay by 16% to £125,000 to match that of Freshfields Bruckhaus Deringer. Slaughter and May meanwhile is remunerating its novice lawyers to the tune of £115,000.
‘There’s intense competition for talent in the international legal sector. We took steps to make sure our remuneration was competitive.’ Justin D’Agostino, Herbert Smith Freehills
However, A&O’s managing partner Gareth Price (pictured) played down the idea of the firm sending a message to the market around financial prudence: ‘You need to look at the financial year and remember it’s not all even – we started to see a softening of the market towards the end of the year. These salary decisions are made by looking forwards, not backwards. It isn’t born purely out of principle – we aren’t trying to be the Bank of England!’
According to data gathered by Simon Marshall at TBD Marketing, A&O may have been emboldened by the fact that it receives the most applications per job of all the Magic Circle firms. Likewise, the firm has grown by 317 people in the first half of this year – equivalent to adding a Winckworth Sherwood-sized firm to its ranks. As of June it was only 89 employees away from matching CC’s overall staff headcount.
Marshall commented: ‘A&O is calling the market here by refusing to budge on NQ salaries. They’re having to balance a load of things at the same time: the possibility that US firms will ramp up again and attract more of their talent, the fact that in-housers have had enough of NQ rates spiralling upwards, its own pipeline and the broader macroeconomic picture.
‘Its first-mover advantage is that it can always change its mind later, of course. In years gone by, we’d see Linklaters move first on something like this, so it’s refreshing to see A&O take the reins.’
For its part, Linklaters similarly decided to temper salary expectations early doors. In an internal email that was seen by Legal Cheek, it said it did not ‘believe that the right course of action is to rush into matching salaries at NQ level without properly considering the impact of any changes and the wider economic context.’
Linklaters further sought to justify its position by saying: ‘A significantly higher proportion of our eligible lawyers received a bonus last year compared to most of our competitors.’
The competition for talent heated up considerably just a day later, as Herbert Smith Freehills (HSF) announced an eye-catching 14% uptick in NQ pay from £105,000 to £120,000. It included scope for further pay-outs, as the £120,000 rate does not include bonuses.
The timing of HSF’s move, one day after A&O’s announcement, suggested that firms nipping at the heels of the Magic Circle had spotted an opportunity in the war for talent. Justin D’Agostino, HSF’s chief executive, was bullish: ‘There’s intense competition for talent in the international legal sector. We took steps to make sure our remuneration was competitive. We are making investments very deliberately – the firm is ambitious.’
This idea was solidified in early August, when Norton Rose Fulbright (NRF) increased its base NQ rates from £95,000 to £105,000, an 11% uptick. NRF’s junior lawyers have the potential to earn between £118,125 and £147,000 when including performance bonuses, which would comfortably eclipse A&O’s base rate. Both NRF and HSF have also raised salaries throughout their UK associate pay scale.
In response to the cost-of-living crisis, NRF also pledged to increase salaries by at least 5%, up to a maximum 10%, for all UK full-time employees who earn under £48,000.
Similarly, mid-tier firms Fieldfisher, Osborne Clarke (OC) and Kennedys took the opportunity to up their rates throughout August and September. Fieldfisher boosted its NQ pay packet by 8%, from £85,000 to £92,000, but the big hikes were made by OC and Kennedys. The former increased its NQ rate for its Reading office by 25%, from £65,000 to £81,000, while the latter raised its rates by a stand-out 60%, from £50,000 to £80,000.
In any case, the top end Magic Circle base rate of £125,000 pales in comparison to the eye-watering sums touted by US firms this year. Among the highest-paying firms, Gibson Dunn offers £161,700, Goodwin pays £161,500, while both Davis Polk and Fried Frank pay their junior lawyers £160,000.
Akin Gump tops the list, having announced a new rate of £164,000 in April. This was increased to a whopping £179,000 in July however, when the firm adopted a more favourable conversion rate for the London office of £1 = US$1.2005.
In September, when the pound plummeted shortly after Liz Truss (who resigned as LB went to press on 20 October) became UK prime minister, Akin Gump implemented a cap on its exchange rate to avoid having to pay its NQs in excess of £200,000.
In July, Baker McKenzie opted for a more modest hike from £105,000 to £110,000, nudging ahead of A&O. The firm did stipulate that all fee-earners are eligible for discretionary performance bonuses, meaning the total payout for NQs has the potential to grow further.
‘These salary decisions are made by looking forwards, not backwards. It isn’t born purely out of principle – we aren’t trying to be the Bank of England!’ Gareth Price, Allen & Overy
Baker McKenzie’s London managing partner, Ed Poulton, commented: ‘At Baker McKenzie, we believe in rewarding in a fair, consistent and competitive manner. The attraction, retention and development of our people is key to the success of our firm and is at the heart of our strategy.’
Given A&O’s reluctance to fuel the pay war, coupled with the ambitious moves made by the firms in the chasing pack, all eyes will be on the rest of the Magic Circle to see whether they stick or twist in their NQ remuneration strategy. Though even with healthy increases in NQ pay among the UK’s elite firms, the gap between the Magic Circle and the American firms dominating London is set to remain wide.
David Pollitt, managing partner of DAC Beachcroft, described the pay increases as ‘crazy’, adding: ‘NQ rates are a bit of a red herring because for every firm that balloons its rates, the bands above get concertinaed up continuously.’
Absent from current discussion is the resulting impact such spiralling rates will have on charge-out fees. The mood among in-house counsel is sour, particularly as general counsel contemplate having to foot the bill for such extortionately-priced juniors.
Concludes one in-house leader: ‘There will come a point where clients will become frustrated with the fees, but that point hasn’t come yet. Law firms are having a phenomenally successful time (if the measure of success is money) but what’s the longer-term impact on the relationship if those fees do continue to grow to pay newly qualifieds higher salaries than some of the GCs they’re probably working with?’