Remuneration deliberations

Merit based salary or top dollar – what is the best method for remunerating those starting out in law?

If you want to feel old, dig into your memories box and take a look at your first pay slip as a qualified solicitor. Now look at the current going rate for an NQ.

Subtract the former from the latter and the result is the amount of hairs that have gone grey during your career as a lawyer.

Last week, The Lawyer revealed that Davis Polk & Wardwell has become the latest firm to join the £100k club – the group of firms in London paying their most junior solicitors £100,000 a year.

It’s an exclusive band made up solely of a few American-founded firms. They say they are simply matching New York rates – $160,000 for first-year associates over there. These firms also have the luxury of recruiting NQs in tiny numbers – Bingham McCutchen, for example, takes just two trainees a year – so can afford to pay salaries which the magic circle, with its legions of junior lawyers, never could.

NQ salaries have rocketed over the last 15 years. Top whack back in 1998 was £33,500. It wasn’t offered by US firm, or a member of the magic circle, but by the mid-tier firm Gouldens (since 2003, the London office of Jones Day).

Though always known for being ahead of the pack salary-wise, Gouldens was no great outlier. Clifford Chance was the top-paying magic circle firm in 1998 at £31,500 for NQs, and most of the largest firms paid at least £30,000. The smaller London players weren’t far behind – Lewis Silkin and Harbottle & Lewis, for example, paid £28,000 to their NQs.

Changes were already underway, however. With growing competition for junior solicitors and high-paying US outfits starting to arrive in the City in greater numbers, firms began to reintroduce six-monthly pay rises for the first time since the 1980s.

A major development came in 2000 when SJ Berwin racked up its salaries and sparked a major pay war. “What we are doing is making damn sure our salaries are highly competitive and we are able to pay the best at the best,” said then-senior partner David Harrell.” We have done this for a number of reasons and we have decided the market has moved and to be at the top rate we ought to adjust now. We are going to see increases in salaries across the board. Increases of 20 to 25 per cent would be in order.”

Whether the shift would have come without SJs making the first move is unknowable, but it seems likely. By 2002, the market had changed drastically. US firms such as Cadwalader and LeBouef Lamb Greene & McCrae were dishing out £65,000 a year to their NQs, far outstripping the magic circle – and SJ Berwin – all of whom paid £50,000. The rest of the market was left even further behind: by this point Lewis Silkin and Harbottles both had NQ salaries in the low-£40k bracket. 

The boom years of the mid-noughties saw NQ salaries escalate further and even the credit crunch and subsequent recession has only caused relatively minor dents. Earlier in the year, Clifford Chance raised its NQ salary to £63,500, bringing it back to the same level as it was in 2008.

So much for the history. The question is: is any newly-qualified solicitor worth £100,000? Or, for that matter, £63,500? And with the rise of legal process outsourcing and new technology now able to complete many low-level tasks, can firms continue to justify these salaries to clients?

The news that RPC is to walk away from the game altogether, replacing its flat-rate NQ salary with a performance-based system, is interesting. “The concept of the flat rate has passed its sell-by date and no longer has any integrity,” says the firm’s managing partner Jonathan Watmough (19 November 2013). 

“It does not recognise the different merits of individual NQs nor does it recognise the market variances between the different branches of law into which they will qualify. Crucially, it does not take into account the pressures clients are under to obtain value from their suppliers.” 

Will the rest of the market follow RPC? Watmough says the firm isn’t trying to set any pace or agenda: “It’s more about correcting an anomaly internally.” 

But for whatever reason, the NQ salary has been viewed as sacrosanct across the City, even when more senior associates within a firm are on performance-related pay. The idea that the model needs to change is questioned by some.

“My instant reaction to the idea of performance-related pay is that if the trainee has performed at a level which induces us to want to keep them on a permanent basis, I don’t see any particular justification for treating any of them differently to any other,” says the graduate recruitment partner of one large international firm. “It’s too early in their careers to find differentiation.” 

“Personally, I don’t like the idea of merit-based NQ salaries,” adds a partner at another international firm. “At NQ level – at least in a firm where you’ve spent only six months in each of your seats – you’re making the transition to associate, starting out as a qualified lawyer and still learning the ropes of your chosen practice area. 

“How quickly and effectively you do that usually depends on quite a number of things, not all of which are within your control as an NQ. So it’s not really fair to base salaries on merit at this stage: nor, frankly, do I think it would result in any better performance from NQs, most of whom are keen as mustard, at least to start with.” 

Watmough’s rationale is that NQs are manifestly not all the same, especially at a firm such as RPC, where there might be a higher proportion of career-changers among the much smaller trainee group.

“Someone who comes straight from university obviously does not have the same experience as someone who’s come to us out of the armed forces, for example,” he said. 

“And obviously, in the course of their training contract people mature at different rates. They could be straight out of university and be the brightest person we’ve ever had and still be at the top of the pay grade. It’s all subjective and meritocractic, and is down to their performance and the business area they are qualifying into.” 

Despite the concerns some have over discriminating at such an early stage, there will undoubtedly be a few managing partners across the City who are glad RPC has broken ranks.

Will it make the high-rolling American firms pause as they push NQ pay ever-higher? Probably not. The global elite are clearly playing a different ball-game, one in which RPC’s salary decisions are of little relevance.

“Not sure why clients should particularly care if a firm chooses to spend profits on this,” responded one commentator to the news of Davis Polk raising NQ salary to £100,000.

“If clients are using these firms in the first place they are clearly not that fussed about the cost,” added another.

But further down the market, RPC’s move allows firms who are under pressure from clients to justify their fees the excuse to mix things up a bit – without necessarily making a huge adjustment to its budget. Performance-related pay, suggests Watmough, will probably cost RPC slightly more in the long-run. 

But the perception that junior lawyers are having to work harder for their dough may play well with clients.

RPC’s graduate recruitment slogan is ‘Rip Up The Rule Book’. By daring to question the NQ salary norm it has proved that it’s willing to do just that.