Britain’s largest international law firms are struggling to attract and retain staff in the US after the crash in the value of sterling compounded their lack of competitiveness in the world’s most profitable legal market.
At least one major hire in New York fell apart in recent weeks as the British pound slumped by almost a fifth against the US dollar, according to people with knowledge of recent recruitment attempts. Existing senior staff — concerned that foreign exchange fluctuations would further erode their salaries — have also asked for their pay to be increased or pegged to the dollar.
The group of “magic circle” law firms that work on the City of London’s biggest deals have historically fought to match their American competitors on pay due to lower overall profitability and more restrictive remuneration models that prevented outsized salaries for star partners.
Freshfields’ equity partners took home more than £2mn each on average for the year ended April 30, the most of the magic circle. However, its profitability remains well below that of the top US law firms, where partners’ average take-home profits exceed $7mn.
Despite such disparities, Freshfields, Clifford Chance and Allen & Overy have succeeded in poaching partners from US rivals, after loosening old pay structures and spending millions on their expansion in America.
However, lawyers said the widening gulf between the pound and the dollar was further harming London-based firms’ ability to hire top partners and could soon trigger defections. While associates based in the US tend to be paid in dollars, equity partners’ remuneration at some firms is at least in part pegged to the pound, they added.
Freshfields uses a fixed exchange rate for pound-based pay, which is now more favorable to US partners, while Clifford Chance uses an average rate, according to a person familiar with the firms.
London-based firms that bill clients in dollars or euros and convert revenues into sterling could also stand to benefit from the pound’s drop, the person added, which would make up some of the pay deficit for those whose remuneration is tied to overall profits.
Freshfields, Clifford Chance, Linklaters and Allen & Overy declined to comment.
Recruiters said currency moves were likely to make the London-based firms more vulnerable to exits by partners moving to US firms in the City — a longtime problem for the magic circle.
Kirkland & Ellis, the world’s highest-grossing law firm, poached two partners from magic circle firms in London in the space of a week in September. The firm hired finance partner James Boswell from Clifford Chance and Allen & Overy’s former global infrastructure co-head Sara Pickersgill.
Tony Williams, principal at Jomati consultants and one-time managing partner of Clifford Chance, said foreign exchange movements were “compounding” an existing problem for magic-circle firms. He said: “The currency difference adds to what was already a challenging environment.”
Currency movements are creating recruitment issues at both the senior and junior end, with US law firms paying far greater sums to associates than salaries on offer at UK-based firms.
“The war for talent was already tough for UK firms and [currency moves] are going to make it even harder,” said Freddie Lawson, a legal recruiter at Fox Rodney. “This will be a catalyst for more moves.”
In London, US-headquartered firms have moved to cap the exchange rate they use to calculate salaries for UK-based lawyers, in order to avoid paying rapidly rising wages as a result of the strengthening dollar.
Akin Gump, a Washington, DC-based law firm, pays its lawyers with reference to a US pay scale, whether they are based in London or New York. The firm used to set the exchange rate it uses to convert US salaries to pounds on a quarterly basis, but has capped the foreign rate as sterling has crashed.
Salaries for Akin Gump’s newly qualified lawyers in London had already risen from £159,000 for the first quarter to £179,000 for the period covering July to September.
Akin Gump would have been forced to increase those salaries again for the last quarter of the year but instead chose to stop matching the actual exchange rate in favor of an upper limit of 1.2 and a lower limit of 1.5. The update was first reported by news website Roll on Friday.
Other firms set an annual exchange rate, meaning some associates could be in line for a big pay jump in January.