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Soaring NQ salaries and falling profits at elite City law firms

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It’s not a winning combination

The London junior solicitor pay war sparked by runaway US MoneyLaw salaries is putting a strain on budgets as profits fall at elite UK law firms.

The uncomfortable combination of higher outgoings and disappointing incomings — laid bare in PwC’s 2017 ‘Law Firms Survey’ — presents a conundrum for the nation’s big legal players.

Should they continue to compete with their American rivals — which have boosted their London offices over recent years and are now enjoying a favourable exchange rate — or should they perhaps try to establish a new more modestly paying model?

Staff costs for fee-earners at the top ten largest UK firms rose from 24.3% to 25.5% this year. In the top 11-25 bracket, the rise was from 27.1% to 28.2%. The upward movement has coincided with jumps in magic and silver circle newly qualified (NQ) solicitor pay to around the £80,000-£90,000 mark. These firms have found themselves forced to boost rookie remuneration in response to the whopping £100,000-£140,000 NQ salaries being paid out by US firms’ London offices.

What they pay and how hard they work -- The Firms Most List

The average profit margin at the top 10 UK firms, meanwhile, fell for the third consecutive year to 36.9% and is now lower than in 2012. Among the top 11-25 firms, the average margin fell for the second year, from 29.2% in 2015 to 27.7% in 2017.

But headline-grabbing junior lawyer pay is far from the only reason for the profitability plunge. Indeed, non-fee earner staff costs have actually risen more sharply (see graph below), while expenditure on IT has soared a whopping 25% at the top ten UK firms.

UK law firms’ costs

PwC Law Firms’ Survey 2017

The real problem, though, is very average fee income growth. While over 70% of the top 100 firms surveyed by PwC saw fee income grow, this was limited to an average increase of between 2.3% and 3.7%.

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