As the big UK firms have flocked to Australia seeking new growth opportunities in the Asia-Pacific region, there has been a gold-rush mentality among US firms keen to capitalise on Hong Kong’s importance as an Asian financial hub.
The influx of US entrants to Hong Kong – along with existing US players’ newly launched Hong Kong law practices – has caused a stir in the city’s legal community in the past year. Many market participants expect this to prompt a tectonic shift in the legal market that will change the pecking order of firms offering high-end transactional legal services.
New York state of mind
Another consequence of the dramatic push in Hong Kong is the significant increase in the salaries of Hong Kong associates, a move that has posed challenges for well-established UK firms in the market.
A salary survey conducted by Hong Kong-based Lewis Sanders Legal Recruitment reveals that in 2011 almost all US firms moved to New York rates for their Hong Kong associates, meaning a newly qualified lawyer could be offered an annual salary of $160,000 (£104,000).
In previous years US firms typically paid Hong Kong-qualified lawyers around 25 per cent more than magic circle firms.
With the New York rates in place Hong Kong associates in US firms can earn as much as 40 per cent more than their peers in UK firms. The survey results confirm that the new salary rates have been a contributing factor to the significant migration of Hong Kong-qualified lawyers to US firms in the past 12 months.
“Most US firms pay New York rates across all practice areas, but those in most demand are lawyers with Hong Kong IPO and US securities experience,” says Lindsey Sanders, managing director at Lewis Sanders. “There’s been a migration from UK and Australian firms to US firms due to the more attractive salary packages. Many UK firms have lost associates to US firms and a number of key partners have moved from UK firms to US ones, taking associates with them.
“There’s been significant movement in 2011. The first half of the year saw significant IPO activity and a number of US firms set up Hong Kong practices, creating a demand for candidates with corporate experience in US and UK firms. While we haven’t yet seen a downturn in activity we foresee a slowdown in associate recruitment in 2012.”
Davis Polk & Wardwell, Kirkland & Ellis, Simpson Thacher & Bartlett and Sullivan & Cromwell are the latest members of the US pack to launch Hong Kong law practices through high-profile lateral partner hires, poachingmainly from established UK firms in the market.
The scramble for talent does not just exist at partner level, but also extends to associate recruitment. Kirkland, for example, has recruited more than 25 new associates at various levels since July 2011, at the same time taking eight partners from top-tier rivals Allen & Overy, Latham & Watkins and Skadden Arps Slate Meagher & Flom.
The firm pays New York rates to its associates in Hong Kong in addition to a New York-sized spring bonus, according to Kirkland Asia senior partner David Eich.
“We made a conscious decision to be at the top of the deal market, therefore we need to have the best lawyers,” says Eich. “In every profession the best talent is the most expensive. It’s the same anywhere in the world; firms that are willing to pay a premium for the best talent tend to deliver premium services. Sophisticated clients are willing for pay for those premium services.”
The knock-on effect is greater pressure on other firms in the marketplace.
“We’ve seen upward pressure on salaries as US firms have extended their operations into Hong Kong,”admits Susan Jackson, Freshfields Bruckhaus Deringer Asia HR director. “As a leading firm in Hong Kong we need to attract and retain the best talent and so we’ve increased our base salaries for corporate transaction associates to match those of the top payers in Hong Kong, including the US firms.”
However, with the firm keeping an eye on its cost base in a bid to maintain profitability, Freshfields’ heightened salary offering means a compromise has had to be made elsewhere.
“If you take a closer look, what this actually means is that a greater proportion of total pay is now being paid as salary and a smaller proportion is paid as bonus,” says Jackson. “So in reality, the actual annual cost to the firm hasn’t increased.”
Another implication of the US firms’ aggressive growth strategy is that they are hitting UK firms where it really hurts – at partner level.
In recent months Freshfields has seen four of its partners defect to US firms, the most recent being local managing partner Ng Kay Ian, who joined Sullivan & Cromwell along with counsel Gwen Wong in June.
Cache over cash
Although most UK firms have felt the pressure, few have moved to match the US firms’ Hong Kong associate pay packages. Some, however, are increasing their bonus pools to incentivise their associates.
“The market in Hong Kong’s quite strong and this leads to some salary increases in the market generally,” explains Clifford Chance Asia head Peter Charlton. “There’s influence from the expansion of the US firms, but that influence is neither a big deal nor is it new. When you look at overall remuneration packages, the difference between top US and UK firms is less significant. While US firms pay a higher base salary we pay our associates a more significant bonus, which can be up to 50 per cent of their annual salary, depending on several factors.
“Instead of paying a higher base salary to everyone we prefer to put in place a better bonus system that recognises overall performance and the contribution of individual lawyers – one that’s fair to lawyers who have worked hard and made a strong contribution.
“Some lawyers will be attracted by the big money, but there are things other than money, such as firm culture, the nature of the work, a supportive environment, career and partnership prospects and a global platform.”
The Asian market is highly price-competitive. Charge-out rates in Hong Kong for Asia-related transactions are generally lower than rates in cities such as London and New York, but the cost of doing business in Hong Kong is high.
Many international firms are operating in Hong Kong on slimmer profit margins than in their home jurisdictions. They are also struggling with the pressure of rising operational costs and the impact of Asian firms offering competitive fee rates. As a result partners at UK firms are generally sceptical about whether paying New York rates in Hong Kong is sustainable.
“Legal salary levels in Hong Kong have gone up significantly since US firms started expanding, principally in capital markets, where they’re hiring Hong Kong-qualified lawyers,” relates a partner at a silver circle firm’s Hong Kong office. “However, there’s a wide variation in the quality of associates they’ve hired. Some not-so-high-quality lawyers are getting paid a vast amount. It’s just madness and it won’t last.”
The partner also points out that Hong Kong is a volatile market and that the number of associates in law firms fluctuates frequently in line with the economic cycle.
“If IPO and equity capital markets work falls off – as it looks like they may well do in the next two quarters – the salary increases will slow down,” he posits.
Centre of attention
Whether UK firms will lose out to their US rivals as a result of the salary increases is hard to tell at the moment.
Nevertheless, the latest salary figures have reaffirmed the strategic importance of Hong Kong to global law firms and have put the jurisdiction firmly on a par with London and New York as a global financial and legal centre.
“What’s happened in Hong Kong suggests that its legal market has reached a global level of sophistication and magnetism,” says Eich. “Global firms’ management teams are now applying in Hong Kong the same sort of salary structures as in other developed legal markets. Hong Kong’s taken a step towards becoming one of the key global legal centres.
“According to the law of supply and demand, there’s essentially now a global price for the highest-qualified associates. Hong Kong’s become part of that global labour market.”