Opinion
US law firm salaries a tug of war?
16/06/2016
The recent US and UK legal press has been littered with news about US law firms and their associate salaries. In this article our consultant Rachael Fowler gives her reaction to the changes. 
 
It has been almost a decade since US law firms have made any significant changes to their salaries for associates. Since 2007, first year associate salaries at US firms have remained at $160,000, ranging in London from £94,000 to £97,000 depending on the exchange rate used – not an insignificant amount of money for a fresh-faced young lawyer having just completed the two year training programme to qualify as a solicitor. Therefore, it is no surprise that the news of the fairly dramatic uplifts last week dominated the legal press headlines. 
 
These changes see the salaries for the class of 2016 (newly qualified/first year associate level) rising to $180,000 (ranging from £110-124,000 depending on the conversion/exchange rate), resulting in an uplift of $20,000 - $35,000 for associates at all levels. Having historically been the firm to set the scale for US salaries, Cravath’s announcement last Monday sparked off a domino effect across much of the market with the other US firms following suit and many more rumoured still to come. 
 
The effect on the legal market is undoubtedly very significant. Over the last year in London, we have seen certain key firms (i.e. namely the non-New York headquartered US firms and the Magic Circle) announce significant increases in order to keep up with the top paying US law firms. This began with Allen & Overy announcing pay rises last July (with NQs moving from £68K to £78K and up to £90K at 1 PQE). 
 
Similar announcements followed from the likes of Proskauer Rose (£90K), White & Case (£90K) and Shearman & Sterling (£95K) moving up towards the £90-100K range for their NQs. There now remains a big question mark as to what these firms will do in response to the ground-breaking changes, particularly if they are to retain their talent as competitor firms. In particular the associate salary gap between the leading UK and US law firms has increased once again and it will be intriguing to see how the major UK firms react to this, especially at a time when they are concerned about maintaining/enhancing their profitability to stem the flow of partners departing UK firms for more profitable US firms. 
 
In addition, there has always been fierce competition amongst the New York firms to be the top paying firm, meaning a watchful eye will be kept on how these changes play out mechanically. There has always been some discrepancy with how each firm converts the US dollar rate into sterling. Some firms fixed their exchange rate some years ago but with the increasing strength of the dollar, this now seems slightly outdated and could spark some additional changes. So far, Kirkland & Ellis are the only firm to announce that they will be basing their London salaries on a variable monthly exchange rate, meaning associates here will get paid exactly the same as their US counterparts. Currently, due to the strength of the dollar, this leads to a more favourable package overall for lawyers in the UK. It is also rumoured that some of the other firms who have traditionally set a fixed annual rate could be moving towards this model. 
 
These are just the initial effects at face value. It will be interesting to see what impact (and if any) these salary uplifts have on the expectations set on associates and subsequently the influence on the work/life balance achievable for lawyers at these firms. Another question mark remains on whether these changes will reach as far as the European market as well, particularly as many US firms are now looking towards key European countries for the next stage of their expansion. As it stands, continental Europe looks likely to be left behind as there are no indications that salary increases will be enjoyed by associates across continental Europe. 
 
So what has exactly driven these changes? Whilst market conditions have caused fluctuations in law firm profitability over the last 9 years, headline profit per equity partner figures have generally benefitted from a trend of increasing target hours and charge out rates for associates. Therefore, it was arguably time that these trends were reflected in associate salaries. This ties in with the high level of debt which US law graduates bear after 6/7 years of study and university costs into the £100,000s; employers in the US are acutely aware of the long-term financial impact on their associates. 
 
Whatever happens, it is certainly not a bad time to be an associate at a US law firm in London. Subsidised tuition fees and sponsored GDL and LPC courses mean that junior associates in London are left with a substantial proportion of disposal income as an NQ earning well into six-figures. 
 
If you are about to qualify, are a recent NQ or associate and you would like to discuss your options within the London legal market please contact Rachael Fowler
 
Rachael Fowler, 16 June 2016.
 
Recruiter Hot 100 2016.

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