Sarah Downey looks at the £20k pay boost and whether the market will follow suit
Allen & Overy (A&O)’s decision to award lucrative associate salaries similar to some US firms in July, as part of a wider overhaul of how it rewards junior lawyers, has sparked renewed debate in the City about how best to retain top talent.
Following a year that saw the Magic Circle firm overtake rival Linklaters in turnover, A&O’s associates will receive around a £20,000 increase in their base salaries as it folds bonuses into the annual pay packet.
Placing the firm on a par with mid-Atlantic wages, all spot-rate salaries also received a ‘market increase’ and associates were paid their annual bonuses for the 2014/15 financial year in July. Standard bonus payments for the 2015/16 financial year will be included in associate base salaries from 1 August this year, with changes backdated to 1 May, while a new bonus scheme will operate to only reward exceptional contribution.
Senior partner David Morley told Legal Business the move provided greater assurance to up-and-coming lawyers on their career prospects and said: ‘We consulted with partners and associates, and spent quite some time analysing market data, so it has been very positively received. By adding our standard bonus to base salaries, we provide associates with more certainty over pay and more consistent recognition for the work they do every day. It also has a direct impact on things like pensions and mortgage applications, which use base salaries as the starting point.’
The move stands against familiar criticism of the Magic Circle that they are failing to stem the flow of departures to higher-paying US rivals. This year’s associate salary race for the peer group saw Freshfields Bruckhaus Deringer freeze pay for junior lawyers at 2014 levels, but other members of the group made significant increases to salaries, including Slaughter and May’s £5,000 bump to £70,000 for newly-qualifieds (NQs). Clifford Chance made smaller increases in percentage terms than its peers, but matched higher rates being offered to qualified lawyers by both Slaughters and Linklaters.
‘Pay is an important factor for people. There is no doubt about that. But US firms run a very different model, which is not what we are trying to emulate.’
David Morley, A&O
But while A&O – which declared its salary change after rivals had already announced their plans – may have wrong-footed rivals to some degree, one graduate recruitment partner at a Magic Circle firm said the move will mean there is less room for manoeuvre when rewarding top performers. ‘It hasn’t gone down terribly well with associates, particularly high performers, because how do you compensate top performers and give them something that differentiates from the average performer when your pot of money for compensation has been changed to pay everyone a relatively high baseline salary?’
The partner added: ‘In saying that, A&O’s system was heavily influenced by a formula based on chargeable hours and performance – there wasn’t a lot of discretion. It probably makes sense for them to move the bonus into the baseline salary compensation, because if you have a better salary figure that helps getting a mortgage. Nevertheless, it’s less revolutionary than it sounds.’
Despite this move, the stark reality remains for the Magic Circle that demand for talent has increased in recent years following the expansion of US outfits in the City, with NQs at Davis Polk & Wardwell paid £100,000 a year and, as the group’s traditional rates and models of remuneration have been slow to react, it has struggled to stop top performers departing to US law firms for large salaries.
However, Morley disputed the firm wants or needs to directly compete with a US remuneration system: ‘Pay is an important factor for people. There is no doubt about that. But US firms run a very different model, which is not what we are trying to emulate. Our model has proved to be very successful over the years and it would not make good business sense to ignore the benefits it delivers for us.
A&O’s revised base salaries
NQ £78,500 – currently £66,500
PQE 1 £92,000 – currently £72,500
PQE 2 £104,500 – currently £82,500
PQE 3 £115,000 – currently £93,500
‘We have always maintained that our total package was competitive in the market, but the bonus was not seen as a core component. By including the standard bonus in base salaries, we feel it better reflects the value of our associates’ contribution.’
However, Charles Martin, senior partner at Macfarlanes, said that remuneration changes cannot be the only consideration when it comes to retaining the best associates: ‘Younger lawyers don’t just look at compensation, although it’s important; there’s the quality of training, work-life balance, the extent to which you get real investment in your education and development, and the working environment – is it supportive and civilised?’
Martin concluded: ‘Of course, it’s of real concern at every level of the market when you lose talent for any reason, including for bigger pay packets. You have got to listen and understand: your response has got to be carefully structured – no doubt about it. Everyone is concerned about all of this.’
sarah.downey@legalease.co.uk