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Market Conditions

In Category: News
Published: 10/02/2014


Lateral Partners

The Lateral Partner market seems to be gaining momentum. Activity levels are high in Energy, Banking and Finance (including Structured Finance), Funds and PE are seeing some real strength and Real Estate has returned with a vengeance. Litigation and Arbitration seem to be maintaining the relatively high levels of interest and success they have enjoyed for the last few years. Pleasingly areas of corporate support such as Tax, Pensions and Employment are mirroring the growth in Corporate Finance and Corporate M & A.

Associate Positions

A noticeable upturn in the appetite for associate level hiring, particularly within transactional practice areas, at the outset of 2014, would appear to be a welcome positive bellwether for City law firm performance in the coming financial year. At this stage, however, this has not had a marked effect on City associate salary levels, with most firms opting to offer modest rises in line with inflation, at around 2 to 3 % and some remaining static. With salary levels fairly stagnant it will be incumbent on firms looking to attract the best talent to look at other ways to reward their fee earning staff, such as better and/or more achievable discretionary bonuses, improved benefits and pensions provisions,  and flexible working arrangements.

Merit-based remuneration

The trend towards linking remuneration to performance rather than a simple PQE based lockstep continues. This is typically being installed from the third year of PQE onwards although some firms are looking at implementing such a system after year-one. Linking pay to formal appraisals, taking into account factors such as billing performance, technical advancement, business development etc. allows firms to reward and promote high performers whilst controlling costs for middling associates. It will be interesting to observe how these systems affect staff morale and whether or not they become “the norm” across the City in the coming years.

The end of Salaried Partners?

The status, remuneration and taxation of salaried and fixed share partners faces its biggest shake-up since the implementation of the Limited Liability Partnerships Act 2000, following the HMRCs decision to scrutinise LLP members’ employee status. It was the HMRCs assertion that the Act had allowed LLPs and in particular law firms to disguise employment and as a consequence avoid employment taxes. They now propose to implement a 3-step test to determine if an LLP member has genuine equity or employee status. The cost implication for both firms and individual salaried/fixed share partners is potentially considerable as employee status will mean the prospect of PAYE, employee and employer NI contributions, in addition to the impact on certain benefits and pensions arrangements.

The 3-step test is designed to determine whether members are:  a) wholly or substantially rewarded via a fixed salary or dependent on the profitability of the firm; b) whether or not they have a ‘significant influence’ on the running of the partnership (i.e. voting rights) and; c) whether or not they have made a significant capital investment in the LLP. As all three conditions must be met to determine employee status the most likely route, and one which a number of firms have already taken, will be for firms to issue a capital call so that all of their members have made a significant investment in the partnership – the threshold is believed to be 25% or greater of their annual fixed salary. It will be interesting to see how firms ultimately deal with this awkward issue and how it will affect the overall incomes of current non-equity partners over the next 12 to 18 months. If the problem is not handled carefully it may lead to firms losing their coveted ‘rising star’ talent and may also have an effect on their lateral partner hiring ambitions.

Cogence Search specialises in London Legal Recruitment and lateral partner moves globally. 


Written by Mark Husband

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