Legal Business Blogs

Resetting associate comp – Better to bend than break but a rethink is still overdue

While it’s surprising in some regards that it took this long, Allen & Overy has done the UK legal market a favour by substantially re-setting compensation bands for its junior lawyers. The move, confirmed on Monday (22 June), will see starting salaries and bonuses for newly-qualified lawyers in London fall from the current benchmark of £100,000 to £90,000 for the intake starting in September.

Clifford Chance later that week announced more modest cuts from £100,000 to £94,500 for salary and bonus, while Slaughter and May had already pushed down its starting base salary to £87,000 for autumn starters, from £92,000.

Giving the scale of the economic challenges facing the legal sector the only surprise is that it took so long. A top City law firm can spend over £60m a year in compensation for UK associates alone, a huge fixed cost now running straight into expectations of heavily depressed utilisation. On of top of this, it is widely acknowledged that junior lawyer pay is artificially inflated by the impact of US law firms running off the larger US market with a somewhat different staffing model. (Not that the system works massively well in the US judged by the growing protest in recent years from GCs about high rates for rookie associates.)

The economics of London firms is clear, with a free hand managing partners would rather pay more to mid-level associates, the effective engine room of these institutions, and cut packages to lawyers up to three years’ PQE. But the transparency of the largely lockstepped system for junior lawyers, and pressure from US rivals with narrower practices, means it is a brave law firm leader who is ready to buck ‘the market’. So law firms get remarkably nervous about tampering with pay bands even in tough times, though many mid-tier players and US firms have already turned to temporary, short-term pay cuts. Yet Freshfields Bruckhaus Deringer took some stick for resetting its compensation in the wake of the banking crisis, even as job cuts piled up all around.

The other major problem with junior lawyer pay is that it is a lagging indicator and so has a nasty habit of inciting salary wars just as the market is about to turn, as happened in the bust and banking crisis. This bakes high staff costs into the cake at the most awkward moment, even with modest moves to erode the associate lockstep model and bring in larger bonus pools over the last decade. While coronavirus is obviously in the box marked ‘unprecedented’, many were expecting the economic cycle to turn even as City law firms last year dished out fresh pay hikes to junior lawyers.

Some try to justify a problematic model with claims that it is partners that soak up all the rewards. Yet the truth is that associates and partners have pretty evenly shared the spoils of an expanding and hugely-profitable legal industry but only partner compensation easily flexes.

While law firms often respond to such cost pressures by cutting business services staff, this would be a particularly odd time to take that course as, apart from workers needed to keep the physical offices running, support staff have been central in helping these institutions manage the largely successful shift to remote working. It is the ranks of far better paid lawyers where firms will have excess capacity, not business services. Moreover, substantive redundancies in law firms often cause more problems than they’re worth in hollowed-out practices, shot morale and lack of ability to pivot for returning demand. Job cuts are worth avoiding for the head and heart and managing partners.

All of which leads to the obvious pressure to tackle staff costs to help law firms get through the coronavirus aftermath. Flexible schemes that reduce hours and pay have already been effective, married to some proportionate moves to restructure associate comp, most large law firms should be set to ride this out well, with the legal industry remaining one of the sectors least impacted by Covid-19.

The question is whether the recently announced moves are enough. Cutting the bands for one or two years, will have only a modest impact, against the millions saved in resetting the entire scale. By late September there should be a good indication of whether the profession will need more drastic measures. If major firms in general try to hold the line on maintaining salaries amid a brutal market, then far more jobs will have to go than needed to make the numbers add up.

All of which leads to the final question of whether law firms should seize the moment and entirely ditch associate lockstep, a system that has shown remarkable resilience despite a decade of firms proclaiming its supposed death.

Different practice areas generate different margins as it is, which struggle to fit into the bands firms deploy. Firms could move to publishing a salary band range to give them some room to move. They could try de-emphasising starting rates in favour of more transparency on generous mid-level remuneration. They could address the restrictions of trying to put the vast majority of their associates through the partnership track and cultivate more career associates to tackle the reality that much grunt work of junior lawyers is mundane.

Perhaps, most useful would be speeding up partner promotions, as the remoteness of partnership is one factor forcing law firms to pay more for associates. With no realistic prospect of jam tomorrow to promise associates, they are forced to dish out lashings of marmalade today.

Whichever your favoured solution, it’s hard to see how the current associate model can stand up to the contradictory pressures building up on it. But knowing the profession, I wouldn’t bank on a serious rethink.

See Associate pay war, anyone? Freshfields sets new Magic Circle standard by raising NQ pay to £100k for more analysis of the dynamics of associate compensation