Weekly take: US law firm salary pressure may whittle down London profits
Salaries for young lawyers in London continue to soar, but where does this battleground end and what does it mean for law firms' profitability?
When we speak to law firm partners, we often find they are interested in the movements of rival firms.
When I asked a partner at a large international law firm recently if they were interested in reports about the earnings of partners and junior lawyers, their answer was clear.
“We want to know which firms are making the most money. We need to know how much to bid for somebody, or how much we have to pay to attract and retain the best talent,” they said.
That second part is interesting.
The implication could be that some law firms aren’t necessarily paying their staff handsomely because they are worth it, but rather they are being forced into it by market competition.
This is the same for many jobs, I suppose, but the legal market seems to provide a particularly stark example.
The reason for this article, incidentally, is that major law firms have in the last few days revealed their 2024 salaries for newly qualified lawyers.
As has been the trend in recent years, US firms with a London presence dominate.
The top five – Vinson & Elkins, Akin Gump, Kirkland & Ellis, Milbank, and Latham & Watkins – are all US firms. All are now paying their young London lawyers more than £173,000 ($212,000) per year.
In fact, the top 20 is entirely made up of US firms. All pay £140,000 or more.
The traditional UK major players, Allen & Overy (A&O), Freshfields, and Linklaters, are far down the list. Those three pay a paltry (I jest) £125,000 to their fresh-faced solicitors.
What’s interesting is the jump in recent years.
In 2017, Freshfields was paying a newly qualified lawyer £85,000, A&O £81,000, and Linklaters £78,500.
Between 2018 and 2019 salaries at all three jumped by around £17,000 before rising further each year to today’s figure of £125,000.
A near 60% increase (in the case of Linklaters) in a relatively short period of time is huge, especially when inflation is much lower than that of course.
Maybe I am wrong.
Perhaps six years is a long time, and perhaps a 60% increase in that timeframe is to be expected.
I can tell you, however, and without throwing shade at my employers, that I have not experienced such a jump.
We can probably safely assume that the quality of lawyers hasn’t improved by 60%.
What’s more likely is that to echo that partner’s comments, firms are frantically trying to remain in competition with each other, specifically with US firms.
Also worth noting is that these three UK firms (plenty of other UK outfits have also increased their starting salaries by similar margins, by the way) now pay the same as each other.
No end in sight
The obvious question is where, if at all, does this end?
Overall, revenues increased at many major firms this year but profits, including profit per equity partner figures, generally stalled or dipped at ‘magic circle’ firms.
We’ve heard rumours and seen some evidence, although not necessarily in IP practices, that a few big international firms are struggling to keep hold of their top talent.
If firms are ratcheting up their salaries but are not as profitable, all the while struggling to hold on to talent, then you’d have to ask whether these constant salary increases are going to pay off in the long term.
A major way firms will try to recoup some costs is through fees. And I suppose as long as clients are happy to cough up the fees, then firms will be able to pay market rates for their young lawyers.
But at what point do clients start to question whether the service is worth the price they pay? If or when they do, then firms will need to think quickly.
Another concerning aspect of this is the expected workload on those highly paid juniors.
My colleague Sukanya Sarkar referenced a similar survey last week on working hours.
That survey revealed that juniors at top firms in the UK were regularly working between 10 and 12 hours a day.
Many lawyers seemed OK with this workload and cited their high salaries as a considerable upside.
But consider the firms’ points of views.
When all is said and done, major law firms are run by often hard-nosed businessmen and women.
If they are forced to sacrifice their own take-home pay to boost young lawyers’ earnings, they will ensure they get the maximum return.
As one lawyer aptly put it on LinkedIn: “A young lawyer should ask themself a simple question. Am I worth £125,000? The obvious answer is no, so expect to be beasted as the firm will somehow extract that in value.”
For non-UK readers, ‘beasted’ originates from the army and refers to the imposition of arduous exercises, either as training or as punishment. It has become relatively common workplace slang.
Young lawyers may be happy with a beasting and some short-term pain, but will there be a long-term gain?