Could the 2024 NQ salary rises signal a change in some key drivers of the London associate hiring market.

Over the summer the magic circle firms (led by Freshfields) increased NQ  salaries by 20% from £125k to £150k.  These increases soon had a knock-on effect with a host of UK international firms responded by also announcing increases in salaries for their NQs, although not necessarily to match the £150k.

In light of the competition that the magic circle has been having from the US firms it is not surprising to see another increase after the 2022 increase to £125k.  However, it is the biggest real term increase that has been made in the last 20 years.

When we compare what has happened with top end NQ salaries at the UK and US firms over the last 20 years, how  and why these have changed then the most recent rise and its size suggests that this increase may propagate a fundamental shift in the London associate hiring market. 

How has the top-level NQ salary changed over the last 20 year?

The graph below shows the top end NQ salaries offered by UK firms in the London market over the last 20 years.   The top paying firms were the Magic Circle firms and each year where there were increases, an increase would usually be announced by one and then the others would follow to match or at least be very close.  

This chart shows the highest NQ salary paid by a UK international firm and a US firm.  The UK international firms paying the highest NQ rates were the magic circle firms, although not the same firm every year.   Data obtained from a variety of sources – thelawyer.com, law.com, Cityam, Legal Cheek, Legal Business and Global Legal Post.

Excluding 2024, there is a level of consistency in the top-end NQ salaries. For both UK and US firms the NQ rate increased by 140% between 2004 and 2023 and 2022 saw one of the most significant increases. 

The other year of note for US firms was 2016 when the top paying US firm pushed their salaries up by 30%.  For UK firms the years of note are 2019 and 2024 when they made step change rises of over 15%.

Whilst elite US firms in London pay associates in sterling, their reference point is the salaries that they pay in New York. UK salaries are effectively the New York salary with an appropriate exchange rate applied.  We illustrate this with the green dotted line in the above chart.  This line shows the sterling equivalent of the New York starting salary (according to the Cravath scale) when the average annual exchange for that year is applied.

The impact of Exchange Rates

Because the top tier US firm salaries in the UK are linked to the New York salary market, it is important to understand how exchange rates have changed over the last 20 years and how this affected salaries that the US firms were able to offer in the UK market.  

Pre 2009 the pound was at its strongest and this equates to a time where the top paying US firms in London were actually paying slightly above the sterling equivalent of the New York salary (see Chart 1)

Post the financial crises sterling dropped around 20% and then stayed around the 1.5-1.6 (£/$) level until 2016 when it had another significant drop following Brexit.  There was a brief rally in 2021, followed by a drop in 2022 and since then we have been at a level of 1.25-1.3

The 2016 and 2022 drops in exchange rate coincide with the significant rises that we saw in Chart 1 for US firms. Clearly exchange rates impacted these rises, but to determine whether the movement was exchange rate related alone, we need to look at what has happened with salary rises in the US? 

The US market

Below is a graph of the top end starting salary[1] paid in the New York market between 2004 and 2024. 

We can see that there were increases given in 2016 and 2022 and so these would have also contributed to the increases in the UK market as well as the exchange rate.

The chart also shows that there has been a slow steady increase in salary, it looks a little different from Chart 1.  In New York, starting associates in 2024 were earning 80% more than starting associates in 2004, this compares to a 200% rise for NQs in the London Market.  

Of course, we need to factor in inflation as this may have been different in the US to the UK.   The below chart shows how inflation in the UK and US has differed over the last 20 years.

As we can see UK inflation was slightly higher between 2008 and 2014 and has also been higher between 2021 and 2023.   Therefore, higher nominal increases in salary would be expected in the UK, but by how much?

Real term salary increases

Below shows the real term salary increases year on year of the top NQ rates in the UK and the top starting salary in the US.

The real rises between 2004 and 2008 were similar.  There is some difference between 2009 and 2015, but the overall effect is a similar.  Between 2009 and 2015 the starting salaries in New York stayed at US$160k, whereas in London top end NQ salaries actually took a small decrease in 2009 and then only started to rise in again 2013.

Since 2016 things have diverged.  There have been 3 years of significant rises in the UK, 2019, 2022 and 2024, where real rises have been in excess of 15%, whilst in the US there have been 3 years of rises as well 2019, 2021 and 2024, but these have all been less than 5%.

In fact in the US between 2015 and 2024 the actual real rise in top end starting salaries has only been 10% whilst the real rise in London has been 73%.

In the last 10 years there has been significant more real increases in the London market compared to the US.  However, because of the exchange rate change over this period, US firms in London have been protected.  Even though the US benchmark salary has lagged UK increases, they have still been able to give real increases that match the UK firms by adjusting the exchange rate that is applied to the New York salary.

The Salary differential

This exchange rate move in favour of the US firms has been important as it has allowed US firms to keep the salary differential between what they pay NQs and the top end UK NQ salaries within a range of 40-60%. 

This is important, as this salary differential has been a major factor in enabling US firms to attract the required talent they need to allow them to grow in the market.

The number of partners at US firms in the UK market has increased significantly and much of the growth has come from the US firms hiring partners from UK firms.  All these hires need to be supported by associates.

At the beginning of 2024 year there were 500 more partners at US firms than at the start of 2019.  Even applying a conservative leverage of 2 associates to one partner, the US firms would have had to hire an additional 1000 (200 new associates each year) on top of any replacement hiring that they would need to do.  We estimate that US firms would need to hire on average 600-700 associates a year if they want to keep growing at the same rate.

Hiring in the London market is hard, but being able to offer to increase a salary by 40-60% makes it much easier and has been used to great effect by many US firms, what would be the impact if they were no longer able to offer that differential?  

Exchange rates have been supporting the differential, but will they continue to?

Whilst real term increases in New York salaries has been lower than the real term increases in the London market, we saw that the salary differential was maintained by the pounds steady depreciation against the dollar.

Had this depreciation not happened, it could have been a very different picture. below shows what the differential would have looked like had the exchange rate not moved in favour of the US firms.   

The dotted line shows what the top US salaries would have been had exchange rates stayed the same, as the five-year average before Brexit and the London firms stuck with benchmarking their salaries to the New York scale.   

Exchange rates are hard to predict, but it is possible that 1.3 (£/$) will become the new norm.  If this is so then any room for increase in salaries by US firms is likely to be driven by what happens in the US market and we see from past behaviour that increases have tended to be just above inflation. 

The 2024 increase and a fundamental shift in the market.

The increase to £150k is significant, it has reduced the NQ salary differential between the magic circle and the top paying US firms from 40% to 20%.  This is a fundamental shift and one that US firms in London cannot easily respond to by making exchange rate changes.  Indeed, if there was to be a sterling appreciation/dollar depreciation in the near term then it would make things even more difficult for them.  

Obviously, the associate market is not just focused on NQs, there is movement at all PQE levels, so why fixate on the NQ rate.   The NQ rate is informative as it is a spot figure, and well publicised.  NQ rates set the base level and salary levels for other PQEs are effectively a function of the NQ rate. 

Firms may operate salary banding models at levels above the NQ level, whereby associates are paid within a specific band.  This gives the firm flexibility and enabling them to ensure that whilst for some associates the salary differential may be go higher than 20% others then can ensure as for the NQs it will have been reduced to 20%.

We are still to see what the US firms do for their salary rises in 2025.   We should hear soon, last year Milbank announced their increase to $225k in November.  To enable the London offices of US firms to return to a 40% differential, the New York starting salaries would need to move to $275k.  This would be an unprecedented 20% real term increase.  In the last 20 years there has only been two increases more than 10% and the highest of these was 14% in 2006 when the market was booming.  

We will have to wait and see what happens, but it will be informative both on the actual rise given and in respect of which firm is the first to announce. Will it be one of the firms with a significant or growing presence in the UK market?

If a 20%  differential is the new norm, this will be a fundamental shift in the associate hiring market and there will be knock on effects that will impact the overall market.

In our next posts, the rackle will look at how a new norm of 20% could impact the market; what the implications might be for US firms, magic circle, silver circle and other UK international firms.  What associates should be thinking about and whether it could affect firms' recruitment strategies.

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