Can London firms cope with the pressure of rocketing salaries?
Alan Hodgart says law firms are going to have to make tough decisions if they want to pay their assistants the new market rates
Several market changes over recent years have contributed to the recent sharp increase in the starting salaries for law firm assistants.London has seen a sizeable increase in the volume of profits and the average profits per partner in the last few years, fuelled by a dynamic business sector.As was the case in the late 1980s boom, pressure has built up to raise assistants’ salaries in light of this underlying upward trend in profitability.The second factor is the increasing difficulty law firms face in recruiting top quality assistants across all levels. Competition for top law graduates now comes from accountants, consultants and investment banks. The professions expanded rapidly during the 1990s and their demand for bright, commercially-minded graduates has far exceeded the supply. Unsurprisingly, well-qualified law graduates are desirable to all professions and some of these pay much more than the legal profession.A third change, particularly at the top end of the market, is the need to achieve greater parity between the salaries of assistants working in London with those employed by the same firm in New York. While pay does not have to be the same (as other professions demonstrate) there has to be a narrower band than previously existed. The need for this is partly due to the one-firm concept (they will often be on the same team on the same deal) and also to the narrowing of performance expectations between top London firms and their peers in New York.But the belief that an exodus of assistants to the dotcom industry is fuelling these pay increases is misplaced. Ambitious young people are not going to abandon a dotcom dream for the sake of £42,000.The impact of this increase in starting salaries has yet to be seen. Many firms in the London market are starting to respond while others are trying to avoid any discussion in the hope that it will go away.The result is likely to be a general increase of starting salaries for all but the smaller firms, but not at the same percentage level as has occurred to date.For one thing, many firms are not recruiting in the same pool as the top firms and the graduates they are after do not necessarily have the desire to work for very large firms. These firms might need to increase starting salaries by 60% of the increase at the top, but not match it.Secondly, the top firms demand long hours and exacting levels of performance. This is partly due to the transactions business being so strong in these firms, but it is also due to the need to perform at the highest levels in order to be competitive. Firms that are less demanding in a relative sense need not match the salary increase of the top firms.Finally, there are many firms whose business environment and career paths provide a satisfying place for many assistants. These people are likely to trade off some of the increase in order to maintain their work environment.However, expect to see an overall increase in starting salaries, which will work its way up the salary scales over the next few months. An overall escalation of assistants’ salaries should be worrying firms, not the additional cost of starting salaries.The economic impact of this for many firms will be more than they can afford at present. Outside the top end of the market, there are many firms that have seen profits improve in recent years but, in relative profits-per-partner terms, are still well behind those of better performing competitors.A 10%-12% hike in the salary bill will come straight off the bottom line for many. Some might be recovered through increasing people’s chargeable time, but this depends on business growth. Little will be recovered through increased charge rates.A firm whose salary costs for assistants totals 30% of income will face a drop in profits roughly equivalent to the salary increase if its profit margin is also around 30%. A lower margin will increase the impact.The subsequent cut in profits per partner might be the straw that breaks the back of many. Better performing partners who have resisted the calls of the headhunters could change their mind, given they might be feeling underpaid at the moment. This could set off a serious longer term decline in the business of many firms: better partners leave, better assistants leave, better clients leave, the quality of work declines and profits fall, thus worsening the situation.Many of these firms would be better off not paying the increase but doing what the other firms that pay the increase will be forced to do: to focus on performance across the firm, not just that of associates. Areas of practice that are generating low profit will probably need to be abandoned. Partners who are not generating enough fees and profits and who are not able to manage clients effectively will face early retirement. Support departments will be expected to justify their costs in terms of their contribution to business growth and development.Focusing on performance is something that in many cases has not been applied as rigorously as it needs to be. If firms are to recover the additional salary costs of assistants then increasing the overall performance of the firm is essential.There is likely to be an increase in the performance gap between the better performing firms, those that can generally afford the salary increases, and those that will have more difficulty because of a relatively lower level of performance.The ‘better performers’ are likely to be more successful at attracting high quality assistants, retaining their existing partners and attracting higher performing partners from under-performing firms. This will drive up their performance even further, strengthen their competitiveness, and enable them to significantly improve the quality of their client base and work.Under-performing firms are likely to move in a reverse way. Unable to match the increases they lose good associates or good partners if they try and match the increases. Either way they face a loss of quality clients and work over time.The consequences of this round of salary increases is serious indeed for those firms perceived to be under-performing in the market. Should they not grasp the issue of performance management quickly they run the risk of a steeper long term decline in competitiveness.
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