UK associates left behind as US firms widen pay gap
26 June 2011 | By Laura Manning
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The gap between associate salaries at the top UK and US firms is widening, with junior associates at UK firms being hit hardest by the recession.
The findings, released by recruiter First Counsel, reveal narrower bands at the junior end of UK firms, with salaries for lawyers with one, two and three years’ PQE seeing the least salary variation, while London-based US firms’ salary bands are the broadest.
First Counsel recruitment consultant Brian Sheehy said: “Looking across all of the data, it’s the case that junior lawyers at most top-tier UK firms are, in real terms, in a slightly worse position than they were two to three years ago.
“This is less true of the top US firms, where salaries have either stayed static at the junior end or increased ever so slightly, notwithstanding various periods of salary freezes throughout the downturn. So a very slight widening of the gap between the top US and UK firms is occurring.”
US firms pay their associates much more than their UK counterparts and there is a wider gap between the pay band for each PQE level.
First-year PQEs at US firms earn an average of between £92,000 and £109,000, second-years £102,000-£112,000 and third-years £114,000-£123,000.
For the magic circle firms, the first-year PQE band is between £67,000 and £70,000, rising to between £72,000 and £76,000 for those with two years’ PQE and £82,000-£86,000 for third-years.
Mid-tier City law firms and West End firms reveal even less variation between the bands for one, two and three years’ PQE.
The results of the survey reflect the recent salary review figures released by the top UK law firms, which show that on the whole associate pay at the junior end has remained fairly stagnant.
Magic circle rivals Allen & Overy (A&O) and Linklaters announced that they were freezing salary bands but allowing associates to receive pay rises by progressing to the next level.
Pay at Linklaters remained at £68,000, £73,000 and £85,000 for associates with one, two and three years’ PQE respectively. Newly qualified (NQ) rates also remained unchanged.
Associates at A&O will take home £68,000, £74,000 and £85,000, and NQ salaries also remain unchanged at £61,000.
Herbert Smith followed A&O and Linklaters by freezing associate salary bands, while Norton Rose pushed its NQ salary up by just 1 per cent and Slaughter and May boosted its associate pay by just 2 per cent but kept NQ salaries the same.
Clifford Chance and Freshfields Bruckhaus Deringer also announced modest rises, with Clifford Chance’s pay bands rising by 1-2 per cent, with first-year PQEs seeing their pay rise by £500 to £68,500. The salary for those with two years’ PQE rose from £72,250 to £75,000, and for those with three years’ PQE from £84,500 to £85,500.
Freshfields’ junior pay scales were also boosted marginally, with the firm announcing an increase of 2-3 per cent for lawyers in their first three years following qualification. One-year PQEs will now take home £69,500 from a previous figure of £68,000, two-year PQEs will see their pay rise from £75,000 to £77,000, while three-year PQEs will see their pay go up from £86,000 to £88,000. NQ pay has gone from £60,000 to £61,000.
“The figures [in the survey] are a reflection of the current market and show few differences from those we were seeing over three years ago,” said Sheehy. “There remains an oversupply at the very junior end, which has resulted in the smallest salary variation at this level, together with NQ salaries lower even than those experienced in 2006.
“Most firms have started to increase salaries in small increments, and it looks as if it will stay this way while there remains such uncertainty over the state of the economy.”
One partner at a top 20 law firm said the lack of variation was also down to the business model for salaries becoming skewed due to the recession.
He explained that in 2005 paying an extra £2,000-£10,000 to each associate was acceptable if an associate was billing 2,000 hours a year at non-discounted rates, but that sort of money now matters.
“I think there was an associate salary bubble at the beginning of the century, partly because of the US firms entering the market,” he added. “Rapidly increasing salaries for associates are fine as long as turnover and profits are going up effortlessly.
“Like the housing market, this caused an expectation of salaries going up forever – everyone wanted and thought they were entitled to an increase. The lack of salary variation is more of a response to this bubble in associate salaries, which was just unsustainable in this market.”
However, larger salary variations are evident for mid- to senior-level candidates due to competition heating up in core transactional disciplines.
Sheehy said this was down to an increase in transactional activity and the market conditions in 2009, when the current crop of two-year PQE lawyers were qualifying.
“There was simply not enough work for retention figures to remain at the levels they had been at during the boom,” he explained. “The much smaller pool from which firms can now recruit has given the current crop of candidates greater bargaining power and has definitely had an impact on salary variations at this level.”
He conceded that applications for jobs at this level had fallen massively, despite the level of vacancies remaining consistent, which is indicative of the smaller pool of talent.
According to the survey, magic circle associates with four or five years’ PQE will be expecting to earn between £92,000 and £96,500, while those with six years’ PQE could take home between £95,000 and £105,000.
Mid-tier City firms and West End firms also reveal more variation in the bands for four, five and six years’ PQE in comparison with the junior bands.
The survey indicates that the introduction of merit-based benchmarking is also responsible in part for broadening the bands for the mid- to senior-level PQEs.
In agreement with this, the top 20 law firm partner said the problem with the merit-based approach was that salary bands will “widen and then wither”.
“Associate pay quickly becomes a matter of bilateral negotiation,” he added. “But how do you judge merit? If you’re not a busy associate, that’s not necessarily your fault. If the firm isn’t busy, who should bear that risk?”
With competition heating up, law firms may need to pay a premium to attract certain candidates in certain disciplines, broadening the bands further.
Those who cannot keep up with the competitive salaries being offered by rival firms may opt to follow in Linklaters’ footsteps by turning to Australia and New Zealand for new associates (The Lawyer, 13 June).