The salary freezes imposed on most Australian lawyers last year are finally melting, but will salary reviews ever be the same again? Angela Priestley reports
Lawyers who were lucky enough to have retained their jobs in 2009 would not have been surprised at the time to receive the news of a firm-wide salary freeze. In fact, the news would have generated little uproar. After all, very few lawyers would have been oblivious or ignorant to just how severely the Global Financial Crisis slowed down legal work across most areas of law.
Salary freezes were implemented across the board. Some of the largest law firms in Australia - including Allens Arthur Robinson, Clayton Utz, Mallesons and Freehills - all confirmed firm-wide salary freezes throughout 2009 with Lawyers Weekly. Most firms have since informed staff that such freezes have been lifted in 2010, and that lawyers can expect a return to their regular pay-reviews. And as a show of goodwill to staff, some firms have undertaken their salary reviews in advance of the usual 1 July deadline.
But with little movement in the pay packet for more than a year now, what exactly can lawyers expect from the review period in 2010?
Perhaps a more pertinent question is what kind of lasting impact - if any - the GFC had on lawyers' salary packages. Will law firms adjust their remuneration schemes to better accommodate dramatic movements in the market - such as that which occurred between 2007 and 2008 - or can lawyers expect a return to solid salary increases once the demand for legal talent really picks up?
The basic numbers
First, let's examine some more immediate concerns - notably, exactly what kind of salary increase lawyers can expect to see through the transition to the 2010/2011 financial year.
The general consensus among recruiters contacted by Lawyers Weekly for this report is that salaries for lawyers will be going up. The problem is that for those left high and dry via a salary freeze over the last two years, lawyer salaries will not be going up by all that much - it will be somewhere in the vicinity of three to five per cent.
It's a reasonable average increase compared to other industries, but an extremely conservative view when compared to the more profitable times for lawyers in the years leading up to the GFC.
But it's those more profitable times - and the unsustainable income packages they offered - that ultimately led to redundancies, bloated salaries and an oversupply of lawyers in the market. "A lot of organisations, to some extent, live for the moment," explains Elvira Naiman managing director of Naiman Clark. "When times are good there's a sense where they will say, 'well I'll pay whatever I need for [for talent] because I need it and because we can't satisfy our strategy or attract the sort of clients we want without it'."
And, as Naiman reminds us, wages are the biggest cost for a professional services industry. Any professional services employer knows that salaries are the best place to start with the axe when cutbacks suddenly become necessary.
Are the days of the big bucks over?
The salary freezes of 2009 and the current conservative salary outlook may well be the market correction the legal sector required. Salaries could have been over inflated during the talent crisis in the lead up to 2008, and such heavy competition for talent may not return for a long time yet. "It [the talent boom] was mainly due to the real lack of banking and finance, and corporate lawyers, especially in the mid-level where lawyers were going overseas in droves, leaving huge leveraging issues for firms in Australia," says Greg Plummer, director, Marsden International. "It's those really in demand candidates that drive up the salary bands, and I just don't think that we're going to see that again for a long time."
It may well take a strong rebound in overseas legal markets to drive salaries up again locally, but Julia Puntoriero, a director with EJ Group questions if the overseas threat to the talent market may well come from within in the future - especially with UK arrivals like Allen & Overy and Norton Rose. She compares it to when the arrival of American firms in the UK forced a market adjustment of salaries at the high-end law firms.
Still, the growing influence of in-house lawyers may well buck the trend of increasing salaries across private practice. Naiman notes that salaries always relate back to how much a lawyer is worth to a client. "As in-house counsel teams get bigger and as costs around legal fees get more scrutinised, I suspect there is going to be more pressure on firms in relation to how much they can charge their clients," she says. "I'd be very surprised if salaries kept increasing in the same ways they did, say between 2003 and 2008."
Bring on the bonuses
Instead of continually driving up salaries to remain competitive in the talent market, many recruiters agree that firms will look to ramp up their bonus and reward-based salary schemes.
"Some firms will change their pay structures to be more merit based, so instead of relying on profitability, it will be based on the billing you've done," says Puntoriero. "That would definitely make a huge difference - it will decide whether somebody is making an extra $30,000 a year or not."
Lisa Gazis, managing director at Mahlab, agrees that a real trend towards bonuses may be the ultimate consequence of the GFC on lawyer salaries. She sees a market correction around salaries in response to structural shifts across the legal profession - which may ultimately spark the call for more merit-based rewards. "It's a market correction in response to the economy and also in response to client demands in terms of billing practices with law firms, and what law firms are thinking might happen in the future," she says. "Firms may try to keep a lid on salaries and reward with bonuses instead."
Return of retention
The term "cautious optimism" has become all too familiar during speculation around how law firms will move on recruitment and retention post the GFC. While legal employers are keen to reward their staff for the hard work they have put in during the downturn, Sandra D'Souza, a director with Dolman, says they will tread carefully. "They [law firms] are telling us they have to remain cautious in terms of the increases they give. While the market is increasing - especially compared to the rest of the world - it is still a case that in some areas it's still patchy."
However, come 1 July, D'Souza predicts some interesting trends in recruitment will emerge. "Some people are adopting a 'let's see what happens on 1 July'," she says. "It could well be that on 1 July we will see a lot of movement in terms of people who were waiting to see what they were going to get."
For Puntoriero, this review period will be the one that sets the firms that treated staff well during the downturn, apart from those that didn't. "There's a fine line between retention and profitability," she says. "If firms did do that [treated staff well during the GFC] then a salary increase will still be necessary, but it won't have to be drastic in order to retain loyalty from staff."
As for those that didn't, time will tell.