Legal Business

‘After Lehman collapsed, salaries still went up’: Magic Circle NQ pay rises as market cools

‘Law firms are stupid. They were stupid last time round. People forget but, after Lehman Brothers collapsed, salaries still went up. Almost automatically they still increased salaries.’ So commented Scott Gibson, director at legal recruitment consultancy Edwards Gibson, as he reflected on the recent round of NQ salary increases at the Magic Circle.

While the market may be cooling, the NQ pay war marches on with both Allen & Overy and Linklaters recently raising their NQ offerings. A&O, which last June froze NQ pay at £107,500, citing a ‘more challenging business environment’, said: ‘We have increased our NQ salaries to £125,000 p.a. in line with the market.’ Linklaters has also raised its NQ salary, from £107,500 to £125,00.

This brings both firms in line with Clifford Chance’s NQ offering, which remains at £125,000. As of last year, Freshfields Bruckhaus Deringer also offered £125,000 to NQs, but is tight-lipped about any changes to NQ remuneration this year.

Slaughter and May’s current NQ pay level is £115,000, although the firm said it operates a different model to peers, with a lockstep offering associates pay progression every six months, a lock-step bonus scheme and no target for billable hours. .

Considering these increases, Gibson said: ‘I was a bit surprised when, as we assume, we are seeing a slowdown in the marketplace.’ Typically market cooling spells trouble for junior lawyers, particularly following a recent recruitment drive.

He added: ‘Law firms over-hired. When they are in a desperate talent war, they tend to compromise on quality due to supply and demand. There are now deal teams and departments that are quieter than they were. This doesn’t usually end well for associates. It’s generally last in, first out. I imagine there will already be some corrections.’

However, it is proving difficult for the Magic Circle to ignore the escalating pressure applied by US firms in the tussle for talent. While the recent salary increases place the firms behind their American counterparts, there is seemingly a reluctance to fall behind UK rivals. As Gibson conceded: ‘They can’t be seen to pay less than their peers.’

With these contradicting factors at play, the demands on NQs to justify their skyrocketing salaries will only increase. Eleonora Wäktare, former antitrust lawyer and managing director at Macrae explained: ‘To put it bluntly, the money must come from somewhere. This means that there is going to be more pressure on NQs to work longer hours. If you are paid more, you cost more, so you must bring in more money.

‘How do you bring in more money? Well, there are two ways. One way is to bill more hours. The other way is to increase the rates. We know that the elite UK firms are also putting up their rates to compete with the US firms.’

However, tolerance to higher fees among European clients is far lower than in the US. The American firms have the advantage of a predominantly US-based client pool who are used to paying far higher rates. Wäktare said: ‘The European clients have not been accepting the higher rates in the same way at all as the US clients. I’ve heard stories of partners going to European clients and saying, “I want to be paid X”, and the client says “forget it”, and just laughs it off and says goodbye.’

In this context, firms face the difficult challenge of maintaining high enough profitability to attract and retain not just junior talent, but high-end senior talent. NQ salary increases have a ripple effect, with their rapid rise in recent years markedly altering pay structures across City firms. Gibson noted: ‘The differential in the late 90s, between NQs and those six years-qualified, was probably 2.5 to 1. In the 2000s, associate salaries above NQs became concertinaed.’

NQ salaries offered by the UK elite may remain an attractive offering for budding lawyers, but progression opportunities and remuneration post the NQ stage do not always match up. As Wäktare observed: ‘There is transparency in the market concerning the salaries of the newly qualified. What is less clear is how does it look further on, when lawyers become more senior, when they have four, five, six years’ PQE? When they are reaching the stage where they are senior but not partner yet?’

As Wäktare explained, it is at this point well trained Magic Circle associates again become attractive pickings for US firms, who can offer much higher salaries, and better development prospects for those eyeing the partner tract.

Pay issues spiral upwards. Wäktare noted that partners, although not exclusively those from the Magic Circle, have approached her because their firms are ‘not competitive on associate compensation’. This leaves partners unable to attract the best associate talent and build out their business practices.

She added: ‘Associate compensation can be seen in isolation, but it should also be seen in the wider picture of what’s the impact on the practice development for a partner.’

UK elite firms are, therefore, left walking a tricky tightrope. Between balancing escalating junior salaries, their ramifications further up the pay scale, competition with their American peers, and an uncertain economic climate, there is little room for misstep.

holly.mckechnie@legalease.co.uk