At the end of last year, Linklaters added itself to the ever-growing list of law firms abandoning the traditional “lockstep” pay model where partners of the same seniority are paid the same, regardless of performance. This is a reminder of the growing competition the UK’s top law firms are facing from bigger and brasher US firms who embrace the more competitive pay structures. The protracted failure of a merger between Allen and Overy and the US firm, O’Melveny and Myers is a further reflection of the difficulty that even the UK’s heralded “Magic Circle” law firms are facing in the tough international climate.
In December last year, Linklaters announced they would be ditching the “lockstep” pay model for one which adopts an element of competition into the pay structure. This model is celebrated by their US competitors, and has recently been introduced by domestic rivals such as Clifford Chance and Freshfields. It allows, they say, those partners who make an ‘exceptional contribution’ to be rewarded for that support. Newer partners may like the idea of being able to out-earn their more experienced colleagues, but it has undoubtedly ruffled a few feathers amongst the old and faithful at the firm. Nonetheless, that is primarily the point. The firm wants to encourage its staff to work more diligently, and is using this incentive structure to continue to increase its revenues.
However, for a firm whose reported average leave time is 9pm, it is questionable how much harder they want their employees to work. The main fears about introducing this competitive element are the abrasive effects it may have on employees’ job satisfaction, mental health, and the collegiality of the staff. One of the few firms who has doggedly retained its lockstep pay structure, Slaughter and May, openly advocates the benefits this has: it allows employees to cooperate more effectively; it prevents them from amassing excessive billable hours, leading to lower fees for clients; and it contributes to their extremely high rate of employee retention.
That said, many partners at Linklaters will be embracing the change (if they thought that their £1.77 million pay packet in 2021 – a rise of 10 per cent over the previous year – was a little measly!). When the stakes are that high, it certainly provides an incentive for their lawyers, particularly those who have most recently acquired the coveted title of “partner”, to dedicate themselves even more to their work.
These changes reflect the growing Americanisation of UK firms’ attitudes to business, and it’s hardly surprising. Whilst Linklaters’ partners did receive £1.77 million last year, that only scratches the surface of what lawyers can make: at Latham Watkins, partners received over £3 million last year, and those at Kirkland & Ellis were paid to the tune of £4.5 million. Just in a bid to retain their best staff, it was inevitable that the Magic Circle firms had to be able to compete somehow, and introducing a higher earning potential for those that meet the tough targets is one way of starting.
American firms present more of a threat to the Magic and Silver Circle firms than just poaching staff, though. Whereas the US firms have practices in both the US and UK (and many more jurisdictions besides), the London-based cohort have repeatedly struggled to break into US markets. This gives the likes of Kirkland & Ellis an inherent advantage, and one which enables them to pay such extortionate salaries. For Allen and Overy, the response to this threat has been attempting to merger with O’Melveny and Myers. However, this has been a lengthy process of failure. In 2019, there were rumours that the merger was “just round the corner”, but ultimately the bid ended in disappointment after the two could not agree on several fundamental issues. The US firm could not even bring themselves to confirm that they were in negotiations with their UK counterpart, even though – a day later – A&O confirmed rumours that the two were in negotiations.
Legal Business said this reflected the ‘stark choices’ facing UK firms. And whilst the outlook might seem troubling, the UK firms are by no means dead in the water. Firstly, in terms of salary, it’s true that the Americans win all day. However, this can’t win everyone over: in 2017 Kirkland & Ellis reported just a 56 percent retention rate of their trainees whereas Slaughter and May retained 93 percent in 2020. These numbers are highly variable, and it would be specious to suggest that there is much of a trend, but it does show that offering 50 percent higher salaries can’t tempt everyone away from the prestigious Magic Circle firms. Furthermore, according to the In-House Lawyer magazine, UK firms have been surprisingly resilient to the threat posed by their American rivals, particularly in the field of Mergers and Acquisitions where relationships and reputations are of paramount importance. Andy Ryde, the partner in charge of the corporate practice at Slaughter and May, said that ‘no large [UK] corporate has got to the stage where they would say “let’s use a US firm instead of Slaughter and May, Freshfields or Linklaters” as their principal adviser’.
It is clear, though, as the number of pay scale rejigs and the salary hikes attest (as well as the failed merger), that the UK firms are aware of the threat their American counterparts pose. For now, the UK firms have held up fairly well, with five of them being in the top 20 global law firms by value, the same number as in 2010. The latest changes made by Linklaters clearly acknowledge the continued pressure being put on the firms in the Magic and Silver Circles, but it is not surprising or worrying. In fact, the competition encourages firms to raise salaries for their lawyers, and to continue innovating. This competition should be welcomed by lawyers.