Rich pickings

The salaries of newly qualified lawyers in the City are going through the roof, while some assistants are set to enter the twilight world of the salaried partner

Salaries for newly qualified assistants have rocketed recently.

Anne Mizzi asks whether this trend is set to continueWhen City giant Clifford Chance put up its assistants' pay last month, it set a new benchmark.

Suddenly, a newly qualified assistant solicitor in the Square Mile could command an unprecedented 42,000 base salary plus bonuses (see [2000] Gazette, 14 April, 5).And, if US developments are anything to go by, this is not the end of the pay increases - Clifford Chance may find it has invited the vampire into its home.Clifford Chance's move set the standard.

City firms were forced to return to their own proposals to check if they would be competitive in the new landscape.

Allen & Overy and Ashurst Morris Crisp were the next City firms to fall into line, closely followed by the rest of the top ten.

Clifford Chance was always expected to be in the front line.

In the last few years, the magic circle abandoned its agreement to set an across-the-board rate, but this year Clifford Chance had a particularly pressing reason to cast the first stone - its 1 January merger with US firm Rogers & Wells.

The US office put its associate pay up to the going local rate soon after its merger.The first stone in the pond which is still rippling this side of the Atlantic was thrown earlier this year by a small Silicon Valley firm, Gunderson Dettmer Stough Villeneuve Franklin & Hachi, which raised first-year associates' basic salary to $125,000 (83,000) with bonuses worth a further $25,000.

Other Silicon Valley firms soon followed in an attempt to stifle a flow of lawyer departures to dot-com start ups.

The trend caught on and it was not long before $125,000 became the standard rate in New York and other US cities (see [2000] Gazette, 16 March, 22).While no one thought the City would attempt to match the rates paid at US law firms, they knew they would be paying somewhere between 40,000 and 45,000 by summer 2000.

And they anticipated Clifford Chance would make the first move as the only magic circle firm which has completed a US merger.The dust appears to have settled at the 42,000 mark at the top end of the market, but lawyers say that this may be the tip of the iceberg.The implications of the new standard are not lost on smaller firms, which have traditionally sold themselves on quality of life and opportunity to specialise.

SJ Berwin realised early on that it would have to raise its pay to stay in the running, while firms like Olswang and Berwin Leighton are introducing performance-related pay and across-the-board bonuses.Insiders say the smaller firms will struggle to pay these kinds of rates, but many have already met the 30% increase, which translates to an income of 35,000 for newly qualified lawyers.

But the impact is unlikely to end at law firms.

Companies will be forced to pay more to prevent their in-house lawyers jumping ship to cash in on the new private practice rates.Richard Wiseman, UK general counsel at Shell International, says he is 'seriously concerned' about the City salary increases and is conducting a salary survey of the new market rates, both in-house and in private practice, which will scrutinise the pay of lawyers up to ten years after qualification.

He says: 'It means, inevitably, increased costs, and that our own salary costs will go up.'As the consumer of legal services, in-house lawyers are also worried the bill will end up on their desks, with law firms increasing charge-out rates to pay for the hikes.

'It would be nice to think that the partners are going to absorb costs out of their own profits, but I suspect they will pass it down to the client,' says the sceptical Mr Wiseman.But the top City firms insist that with soaring profits, they can afford to reward their assistants for their hard work.

Simmons & Simmons partner Tom Keevil says: 'From my perspective, there is no way that clients should have to swallow the cost of the increase.

Put simply, people are going to have to work harder.' Ashursts' managing partner Ian Nisse says that assistants are a firm's 'lifeblood'.

He maintains: 'Law is a people business and the best law firms need the highest quality individuals at all levels who are properly motivated and rewarded.

It's only by this that they can provide a quality service to the top players in a competitive market place.' But assistants' pay remains a legal hot potato.

The dust may have settled for the time being, but the battle for talent continues to rage.

Insiders warn there may be further tweaks to come.Last week's news from recruitment consultants Taylor Root that US law firms are paying up to 102,000 for newly qualified lawyers is the first time lawyers have the potential to earn more than 100,000 on qualification (see [2000] Gazette, 18 May, 11).

The sum seems even more outrageous given that lawyers have to be billing two and a half to three times their salary as a general rule of thumb to cover salary and overheads.

Most US firms in London are paying a 'mid-Atlantic' rate.

New York-based Weil Gotshal & Manges is typical, paying on a scale of 50,000 to 90,000 for newly to four-year qualifieds, with a bonus for all personnel, based on office and personal performance.

James Chesterman, London banking head at Weil Gotshal, says: 'The US firms will continue to compete and grow in London, and there will continue to be heavy recruitment from the English firms.

My expectation is that the English firms will be forced to narrow the gap.' The next round of US firm pay increases is expected over the summer, as they prepare for the next intake of law graduates to join in September.

And as long as the boom time continues, there is no sign of the upward spiral abating.

Martin Pexton, personnel director at Allen & Overy, is not alone in his thinking when he says: 'The market hasn't settled.

These forces are still at work, they haven't gone away.

The American influence is particularly strong for those City firms practising New York law.' This is especially true for the law firms such as Eversheds, Denton Wilde Sapte and Rowe & Maw, which have still not completed their annual reviews.

But some firms have seen it as imperative to bring forward their announcements given the recent raises.

Lawrence Graham has brought its pay review forward to June from September, while Paisner & Co is announcing its new rates of pay in July rather than November.

Billing targets are key to the salary issue.

Herbert Smith realised this last year and introduced formal billing targets for the first time, as has Allen & Overy this year.

Clifford Chance and Simmons & Simmons have raised their billing targets, and a Graham Gill survey recently revealed law firms have, on average, raised billing targets by 150 hours a year.

This indicates that UK law firms are moving closer to a US-style billing culture.

The Graham Gill survey confirms that US firms expect their lawyers to bill between 2,000 and 2,200 hours per year, while UK targets are being raised from an average of 1,400 to 1,800.

In spite of this trend, there is still a hard core of firms, ranging from Slaughter and May to Olswang, which have steadfastly refused to introduce billing targets.

Last year, Olswang introduced a firm-wide bonus scheme, and has just introduced an individual bonus range for fee-earners based on a combination of individual and firm performance.

Olswang's chief executive, Jonathan Goldstein, claims the scheme is novel: 'It is different from what other firms are doing because it applies to newly qualified lawyers.

Other firms are giving bonuses to one-year qualifieds,' he explains.

What is new is that they are offering fee-earners performance-related bonuses on top of their existing bonus, which all Olswang staff were paid for the first time as the firm busted through its 1 million profit target this year.

Although Olswang is not matching the 42,000 rate - it is only going to 40,000 - Mr Goldstein argues his assistants will have the potential to earn up to 45,000 with bonuses.

But he admits being a specialist player is not enough to compete at the top: 'We do believe we are distinguished from other firms.

Media, technology and e-commerce is an interesting spin but we are not nave enough to assume that is enough.' By all accounts, it is not just pressure from the US that has sparked the salary hikes.

All the top firms have lost potential partners to dot-coms, including Linklaters, Allen & Overy, Berwin Leighton, Dibb Lupton Alsop, SJ Berwin & Co and Denton Wilde Sapte.

And merchant banks also continue to be a popular destination for magic circle trainees and newly qualifieds.

Dominique Graham, a director at Graham Gill, sums it up: 'All of this is very much suck it and see.' Pay may continue to rise in boom times, but if there is an economic down-turn, firms will have to tighten their belts and see where they can make cost-savings.

And there are no guarantees.

'One has to wait and see,' says Ashursts' Ian Nisse: 'After all, it is a market place like any other market place.'Is being a salaried partner a compromise or a good way to begin the climb from assistant to equity partner? Jon Robins reportsQuestion: When is a partner in a law firm not a partner? Answer: When he or she is a salaried partner.

As a joke it might not be terribly amusing and, no doubt, in many cases it is unfair.

But at the same time there is more than a grain of truth in the observation.If you have recently been made up to salaried partner, the chances are you will not be recognised as a partner under the law or even by your peers at the first partners meeting you attend.

But, then again, you are on the first rung of the partnership ladder, and your friends and clients need never know that you have not got equity.Partners come in many shapes and sizes: some are on a salary; others are 'fixed share' partners with a guaranteed minimum amount plus a percentage share of the profits; while others are full equity partners.

Many firms refuse to disclose the tiers of partnership and are more than happy to give their clients the impression that they are all equal part-owners of the business.Nor is it a matter of great concern to anyone outside of the firm.

'So far as the outside world is concerned, if your name is on the notepaper you're a partner and share the liabilities,' says Ronnie Fox, senior partner of London firm Fox Williams and chairman of the Association of Partnership Practitioners.However, the different gradations make a world of difference to those junior partners on the first step to full equity and a share in the big profits.

It is either a 'transit lounge' through which the bright young talent passes on its way to the top and a full equity stake, says Mr Fox, or it can be a 'parking space' - as he delicately puts it - for those who have made 'a valuable contribution' but 'for strategic reasons or any other reasons' are not destined to climb the partnership ladder.Tony Sacker, head of partnership at City firm Kingsley Napley and chairman of the City of London Law Society, says it can be a useful stepping stone.

He maintains that many firms do not allow solicitors to be managers 'in the real sense' and it is an opportunity for them to demonstrate their worth before the big jump into being part-owner of a business.

He also points out that for those young lawyers who want to make their name, it is difficult to build up a client base as an associate.But the fact that you are called a partner does not mean you are a 'partner' under the Partnership Act 1890, Mr Sacker explains.

Partners are defined according to their involvement in management and the risk that they bear, not how they are paid.

Clearly, if they are employees - and not partners under the law - they are entitled to the benefit of employment protection legislation.In terms of liability, the equity partners indemnify those on salaries.

Mr Sacker explains that the only practical exposure - as opposed to theoretical exposure - is if such a financial disaster befalls the firm that the equity partners are unable to cover their obligations.

By contrast, equity partners agree to make contributions for liability according to their share of the equity.Earlier this month, London firm Fladgate Fielder announced that it was appointing five new partners.

According to its chairman, Paul Leese, the composition of the partnership follows a rigid structure of 'salaried partner, junior equity, senior equity' with all new recruits starting on a salary.

A 10-page partnership document sets out how solicitors can progress through the firm.

'It is a career progression and people can see themselves moving up,' he says, adding that it is both good for solicitors' morale and prevents 'fall-out' as the firm grows.Mr Leese explains that the bottom rung of the partnership ladder is more than just a nominal position.

They might be salaried partners, he says, but they see all the documents and participate in all the meetings.

They also have equal votes, though there is a mechanism for the others to override this.Peter Maynard, a salaried personal injury partner at Leo Abse & Cohen in Cardiff, admits there was not a radical change in responsibility when he was made partner last year, as the firm divorces line management from partnership issues.

The firm follows a similar partnership model to Fladgate Fielder and senior associates join the partnership on a salary as a first stage.But he has no complaints and says the real change is being able to make his voice heard in the running of the business.

'In a partnership, you appreciate that there has to be a democratic way of running things and you want to be able to have an input,' he says.

With the increasing use of fixed share arrangements, the definition of salaried partner has greyed over recent years, says Nick Root of legal recruitment consultants Taylor Root.

In particular, a change in the tax regime a couple of years ago means that a fixed-share partner is treated as a full equity partner for tax purposes and, consequently, the firm will not have to pay hefty national insurance contributions.

As a consequence a number of firms elevated their salaried partners to fixed share status.According to Mr Root, few top-50 firms have salaried partners at all, and in the magic circle firms, senior assistants join as full-blown equity partners.

If a partner earns 100,000 a year, the firm has a 12,000 national insurance bill to meet if that person is on a salary.Ronnie Fox points out that many firms use the salaried partner tier as a way of introducing new partners into a firm after a merger.

He notes that it is a way of easing the transition when there are disparities between the different criteria and pay levels of the two firms.

Another managing partner at a mid-sized City firm says that all their lateral partner hires are made on a salaried partner level.

He explains that it provides a breathing space for the firm to ensure that the new recruits fit into the firm's culture, as well as allowing them to get to know how the firm operates.There is a suspicion that keeping partners on a salary is a cheap way for firms to bump up partner numbers to impress the clients without cutting into the equity.

Ronnie Fox says some firms have made their senior associates into partners without even a pay rise.

'But it's important for them to tell their friends and their clients that they are partners,' he adds.Most salaried partners regard the status as 'extremely uncomfortable', notes Tony Sacker.

It could be argued that they are taking the risk but not sharing the benefit, he says, adding that if the firm's fortunes take a serious turn for the worse, they are exposed to liability, but they are excluded from taking a proportionate share should they dramatically improve.Lucy Winskell, the Law Society Council member for young solicitors and a salaried partner in the Newcastle office of Eversheds, says the firms are doing themselves no favours by not involving their new partnership recruits.

'You can get the best out of your salaried partners by making sure that they are fully involved in the decision-making and management issues,' she says.She points out that the number of lateral hires highlighted in the legal press is evidence of a greater mobility of younger partners.

'It seems as if there is no longer the concept that once made a salaried partner you necessarily stay with that firm until the day of your retirement,' she says.

But of course, partners who have no money tied up in the firm's equity do have a greater freedom to move on.However, the bottom-line is that being made up as a partner - salaried or not - is a vote of confidence in the solicitor.

As Tony Sacker says: 'The fact is I wouldn't make someone a partner unless I was happy to go into a meeting with a client and introduce this individual as one of the partners.'

City pay: how london offices compare London offices of US firms (east and west coast)

Level of qualification Range (000)* NQ 50-70 1 year 55-83 2 years 60-92 3 years 94-110 4 years 106-119 5 years 112.5-128large central london/city firms (over 70 partners) Level of qualification Range (000)= NQ 35-42 1 year 43-50 2 years 45-58 3 years 48-64 4 years 52-70 5 years 56-78medium/niche central london firms Level of qualification Range (000) NQ 33-36 1 year 35-38 2 years 37-42 3 years 39-45 4 years 42-52 5 years 45-58* The range reflects the wide disparity in eats and west coast salary levels.

At the lower end, west coast salaries run close to UK rates, whereas the top end represents much higher New York rates.

In addition, most New York firms have supplemented salaries with bonuses ranging from c4,000 to 18,000.= These figures do not include the significant number of firms offering discretionary bonuses ranging from 20% to 40%.Source: Graham Gill