Onus on the bonus

A&O rocked the City with the news that it was to hike associate pay and introduce bonuses. Lawyer 2B can now reveal how the Citys finest measure up.

It was an ambush. As first reported on www.the lawyer.com (12 October), Allen & Overy (A&O) shocked its rivals by announcing a 15 per cent pay rise for all of its London-based trainees and associates and a new performance-related bonus linked explicitly to partner profit.

The news surprised A&Os rivals: the firms associates had already received catch-up pay hikes earlier in the year, sparked partly by A&Os decision to raise its associate rates by 20 per cent last November in response to an attrition rate of 25 per cent.

At the time Lawyer 2B went to press, Slaughter and May was the only other top 10 City firm to announce changes to its remuneration structure.

Slaughters has introduced a firmwide discretionary bonus of 15 per cent for all associates and trainees as part of its pay review. This is a significant move for Slaughters as, until last month, it the only top 10 City firm without an associate bonus (see table).

The firm also raised salaries by between 12 and 15 per cent for associates at all levels. The review was started long before A&Os
recent associate pay hikes, but that news was considered as part of the review.

Newly qualified associate salaries were increased to 60,000 from 1 November. First-year trainee salaries jumped from 31,000 to 34,000. Second-year trainees, meanwhile, now receive 38,000, a hike from last years 34,500.

Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters, meanwhile, have decided not to follow A&Os lead.

In private partners at a number of firms were quick to stick the boot in; some even admitted that they did not fully understand how the new bonus scheme works and questioned whether associates at A&O will even be better off.

One magic circle partner argues: It does look a bit desperate. Another partner was concerned that rival firms may be forced to act like lemmings.

On the face of it A&Os associates look like they are going to be in for a massive windfall. Indeed, senior associates will, in theory, be able to earn almost 200,000. This amount dwarfs the potential maximum payment of 139,600 for which Linklaters senior associates are eligible.

Linklaters associates with five years PQE receive a basic salary of between 94,000 and 98,000 and a performance-related bonus of up to 40 per cent, as well as a firmwide bonus, which last year was 2,400.

But once you push the headline-grabbing numbers aside, it soon becomes obvious that A&Os new remuneration structure is not entirely what it purports to be.

A&Os new pay structure has two limbs. First, all London-based trainees and associates will receive a 15 per cent pay rise, effective from 1 November 2006. This is essentially to replace the firmwide bonus, which is being scrapped in favour of a performance-related bonus. The firmwide bonus that was paid to all staff at the end of the 2005-06 financial year was equivalent to six weeks pay which is a little more than 10 per cent of the base salary. As such, trainees and associates may not be significantly better off under the new system.

Second, the firm has introduced a performance-related bonus in a bid to reduce associate attrition rates.

Our survey also reveals that, when it comes to performance-related bonuses, A&O is playing catch-up with its rivals. With the exception of Slaughters, all the firms surveyed offer performance-related bonuses to their associates.

Indeed, as Joanne Street, a business manager at recruiter Hays, says: Theres an expectation from associates at all levels that part of their remuneration package will have a bonus element. Firms that dont have bonuses will suffer when recruiting.

Law firms have to be more commercial these days and have to reward high
performance. The flat structure has gone.

A&Os bonus does, however, have two features that make it unique among the rest of the top 10 City firms. Rather than copy its rivals, A&O has opted for a structure whereby the size of the bonus will be linked to the value of a partner profit point (see table).

Furthermore, in a cunning attempt to improve retention rates, the first performance-related bonus is not going to be paid until July 2008 (yes,
you have read that correctly) to encourage retention. A&O is the only firm in our survey that has such a lengthy vesting period. All the other firms pay their bonuses two to three months after the end of the financial year.

A&O is also the only firm in the top 10 that does not offer a performance-related bonus to its junior associates, with associates needing at least two years PQE to qualify for the bonus.

Linklaters, which introduced a performance-related bonus several years ago, is arguably the most generous to its junior lawyers. Trainees and junior associates are eligible for up to a 40 per cent bonus. Indeed, some of the firms associates received a 40 per cent bonus at the end of the last financial year, while a handful received even bigger percentages.

The size of Lovells bonus is also the same at all levels. But its maximum award of 30 per cent is less than Linklaters.

A&O and Freshfields Bruckhaus Deringer are the only firms in our survey that do not link their bonuses to chargeable or billable hours targets. Meanwhile, Norton Rose recently slashed its billable hours target, meaning its bonus now kicks in when 1,500 hours have been recorded. Up to 100 of those can be devoted to knowledge management.

The debate on the advantages and disadvantages of bonuses continues to rage, but one thing is for sure: bonuses are here to stay. And like it or not, A&Os remuneration structure has compelled at least the Citys firms to be more transparent about how they calculate the size of their bonuses and determine how the pot is shared.