Pay war looms as City giants raise salary stakes

City firms are on the verge of a pay war with the news that Allen & Overy (A&O) is set to raise its associate salaries for the second time in recent months, as magic circle rivals prepare to announce new payment packages for junior lawyers.

An increase in City associate salaries had been expected since last October, when A&O announced a 15% hike in pay for London associates. However, news that the firm is set to raise rates again will put pressure on magic circle rivals to review their own proposed increases.

A spokesperson for A&O said the situation was currently under review.

The news comes after Clifford Chance (CC) yesterday (12 April) announced it is to increase its associate and trainee salaries by up to 15%, with newly-qualified lawyers taking home an extra £7,500 from 1 May.

CC announced earlier this week that newly-qualified solicitors' salaries will rise from £55,000 to £63,500. One-year post-qualification experience (PQE) associates will see their salary go up from £60,000 to £66,000; two-year PQE lawyers go from £70,000 to £79,000; and three-year PQE salaries will climb from £81,000 to £89,000.

The increases mean CC is only just on a par with - or in some cases trailing - the benchmarks set by A&O last year, when the firm upped newly-qualified pay £63,300, one year PQE salary to £69,000, two years PQE to £80,000 and three years PQE to £88,600.

A key consideration for firms will be how to build flexibility into pay packages through performance-related bonuses, with the City likely to face a slowdown after the M&A boom of the last 18 months.

The head of human resources at one City firm commented: "If there is a drop in the market, firms will need to look at costs - and the biggest cost of all is the headcount."