The war for talent: will A&O's pay hike convince assistants to stay?

Associates at Allen & Overy (A&O) will no doubt be walking around with huge smiles on their faces this week. Today (17 October) the magic circle firm’s London-based associates received inflation-busting pay hikes.

A&O was forced to take significant steps to retain disillusioned assistants and has responded by boosting its assistant salaries by as much as 20 per cent in some cases.

As first revealed by The Lawyer earlier this month (3 October), A&O is also set to radically overhaul its partnership track after it emerged that the firm had an assistant turnover rate of 25 per cent in the last financial year.

But A&O will be reassured to know that it is not alone in its battle to stop talented associates marching out in protest. The traditional partnership carrot is almost unattainable and associates are threatening to defect en masse to the investment banks. Other law firms will also need to raid their coffers.

Indeed, the move by A&O to bolster its assistants’ pay packets is set to trigger a salary war similar to the one witnessed in 2000, when SJ Berwin raised assistant salaries by as much as 25 per cent (see box).

With so many associates missing out on any significant pay rises in recent years, when news of A&O’s pay hikes filter through the market, assistants at other firms are likely to demand similar salary increases. For instance, the last time Clifford Chance increased its associate pay was in 2003. Linklaters, meanwhile, increased its assistant pay by just 2 per cent in May (The Lawyer, 13 May).

As reported on this week’s front page, as of 1 May 2006, an A&O associate with two years’ post-qualification experience (PQE) will earn £71,000 (excluding the firmwide bonus).

In contrast, a two-year PQE associate at Clifford Chance or Freshfields Bruckhaus Deringer will earn £62,000, while Linklaters’ two-year PQE assistants receive £65,500.

The wages war witnessed in 2000 was sparked by the huge exodus of talented lawyers who were being lured away from City firms to US rivals offering silly sums of money. But the threat today is not so much from US firms - rather, it is from the investment banks and financial institutions, such as hedge funds.

Although there is still a dearth of in-house legal jobs in the investment banking sector (notably in M&A), there are plenty of in-house vacancies for talented lawyers in areas such as derivatives and structured products.

One senior in-house lawyer at a major US bank said: “The reality is that there are not enough derivatives lawyers to meet the demand in the banks, so some banks are hiring junior finance lawyers and training them up.”

He added: “We’re able to cherry-pick the best candidates. So the problem the law firms are facing is not the volume of associates leaving - it’s the loss of talent.”

According to recruitment consultants, investment banks are prepared to pay top dollar to attract the best candidates. Unlike law firms, which typically have salary bands based on levels of experience, investment banks pay their lawyers on merit. Consequently, the remuneration packages paid to lawyers of the same PQE in investment banks vary dramatically.

Nevertheless, an associate with two years’ PQE can expect to earn as much as £120,000, comprising a basic salary of between £70,000 and £80,000 plus a discretionary bonus of up to 50 per cent of their basic salary.

Meanwhile, some banks are offering an associate with around five to six years’ PQE a basic salary of approximately £120,000 plus a discretionary bonus. Although the bonuses paid by banks range between 25 and 50 per cent in some exceptional circumstances, bonuses for senior lawyers have been as high as 100-150 per cent, meaning that a lawyer with five to six years’ PQE could take home as much as £300,000.

According to one legal recruitment consultant, a bank recently offered a magic circle associate with three years’ PQE a remuneration package incorporating a £70,000 basic salary plus bonus, with a £5,000 signing on fee and a car allowance. The package also included 30 days annual leave.

According to another legal recruitment consultant, in-house roles in hedge funds and investment funds are also plentiful. “If I were heading up the hedge funds or investment funds group in a law firm,” he said, “I’d be worried about the threat of lawyers from my team moving on.”

But nowadays money is not the only temptation for talented associates. Many associates told The Lawyer that moving in-house is attractive because it is increasingly difficult to become a partner. They also cite that well-worn phrase: lifestyle reasons.

One recruitment consultant said: “It’s not just about money. If that were the case, associates would move to US firms. Banks offer more opportunities. In a law firm, in terms of the work you do, you’re boxed in, and the only career path available is to become a partner. In a bank there are a lot more options - for instance it’s possible to move into a transaction management role.”

If law firms want to stop the brain drain they need to take proactive steps to appease an ever-growing body of disgruntled associates. Otherwise their loss will be the associates’ gain.

2000: when SJ Berwin sparked the first salary war

SJ Berwin sparked the first salary war between City firms in 2000 when it hiked assistants’ wages by an unprecedented 25 per cent. The move saw a raft of law firms, including Allen & Overy, Ashurst, Clifford Chance, Norton Rose and Macfarlanes, follow suit to compete for the best talent.

The dotcom boom and the influx of US firms had increased competition in the London market, with IT and telecoms, private equity and corporate finance lawyers in huge demand. US firms such as Cleary Gottlieb Steen & Hamilton, Latham & Watkins and Sullivan & Cromwell were among those paying New York rates to assistants in London.

But just three years later Clifford Chance sent shockwaves through the legal sector when it slashed assistant fees to £48,000 from £50,000 – “to reflect a more difficult market environment”, according to the firm.