It is that time of year again. Salary reviews. Or rather, salary hikes. The time when law firms go like lambs to the slaughter, raising assistant salaries beyond inflation and arguably beyond common sense. Only last week, the chief executive of a large City firm shared his well-thought-out strategy with me: “We'll do whatever Clifford Chance does.” Now that's what I call leadership.
Admittedly, some law firms have shifted their review dates back to the summer so that they can observe the magic circle, but most of them usually copy the salaries or thereabouts. Still, they get points for effort.
However, that might all be about to change. There are rumours that some law firms are going to break rank. Many are thinking the unthinkable – reducing salaries. Let me be clear: that does not mean leaving salary bands at their existing levels, but narrowing the top end of those assistant bands.
Never mind Clifford Chance, law firms are under pressure to fight spiralling costs and shrinking turnover. There is not much in the way of ammunition. Of all the controllable overheads, might salary be the one worth tinkering with? Passing increasing costs to clients will not wash; merging is the equivalent of 'any other business' on the agenda and increasing partners' contributions to capital somehow seems unlikely. It is little wonder that cutting assistant salaries is the hot topic in those smoke-filled management meetings. My guess is that, at the moment, only one thing holds them back – fear.
If only one firm cut salaries, the outcome would be obvious, but bearing in mind the tendency of law firms to flock together, what if others followed suit? No one denies that they would if they could. So can they? Could 2002 mark the beginning of a new era for law firm remuneration structures?
Every year a select group of HR professionals from a number of City law firms meet behind closed doors, allegedly to share sensitive market information and to predict the impending salary review. Most law firms apparently hope that the magic circle will not go too far. This year, the fear is that they will not go far enough. Not with rises, with cuts. Most want the magic circle to lead the salary war. The irony is that it is the magic circle firms that can probably most afford to maintain salary levels or raise them. So could the elite mid-tier begin to break away and declare that they will pay different rates but in return offer something different, financially and non-financially?
At least one law firm, which is often used as the salary yardstick, is contemplating scrapping spot salaries and/or salary bands and adopting an entirely merit-based salary. Its thinking is, why on earth should it be paying some people what they are not worth? Put like that, it seems a no-brainer. It intends to control its cost structure by awarding its super-performers investment bank-type bonuses. Of course, bonuses do nothing to help retention, but they do put the employer in the driving seat. We all know what happens to bonuses when the going gets tough.
Within a matter of months the dynamics of the marketplace will shift back. This is about the only window that law firms will have for the foreseeable future to address salaries. This downturn has arguably seen a more proportionate response by law firms than the last. Generally, they have not overreacted but have pruned. It suggests that lessons have been learnt. But that does leave one stone unturned – salaries. Most firms admit that they allowed salaries to escalate beyond control. As to who is to blame, does it matter? The US firms… too many cutbacks in the last downturn fuelling the shortage… recruitment agencies talking up salaries (absolutely not!)? Or maybe all of the above?
A number of law firms are playing a game of 'what if?'. What if we cut salaries? What if we restructured the training contract (as some are contemplating)? What if we ran our firms like corporates? In an age of the first limited-liability law practice and multidisciplinary partnerships, it may not be such a juvenile game to play. Not speaking from experience, but it is rather like a game of dares – sooner or later someone might take the plunge. And it might start with the most tangible asset of them all – salary.