After Big Salary Hikes in 2022, London Law Firms Face Reckoning in 2023

In 2022, London’s largest law firms paid out in a big way to secure the brightest young recruits money could buy. Now, with revenues from deal making expected to slow dramatically in 2023, meeting those salary agreements could become a lot tougher.

Global deal making fell to $3.5 trillion last year, which was down nearly a third from 2021’s record activity. This steep decline came as a result of a perfect storm of inflation, higher interest rates, and geopolitical struggles.

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Now, many law firms are predicting a further slowdown in M&A and IPOs next year.

In order to narrow the gap with top U.S. firms in London, many of the U.K.’s top law firms raised salaries for newly qualified lawyers to as much as £100,000 ($120,600) in 2022. But the value of IPOs in London — a key source of cash for the law firms that advise on such deals — fell in the first half of the year to the lowest it had been since 2008.

Considering the U.K., along with much of the rest of the world, is now on the brink of a recession, a financial reckoning may be in the cards.

London’s top firms and their largest U.S. rivals made “a real mess of the pay scales,” according to Nigel Knowles, CEO of the law firm DWF Group Plc. Instead of messing with its own pay scales, DWF decided to offer its junior lawyers shares in the company in 2022 — which of course is not an option for the majority of firms that are unlisted.

In order to find the revenue to cover the increase in salaries without squeezing profitability, firms will likely look to slim down their payrolls and trade up to more lucrative clients, according to Nick Roome, head of KPMG legal services in the U.K.

“They’re probably going to do less, narrow their business models towards the super-premium activity that can support that sort of cost base,” Roome said. “You are going to see some areas of law that they’ll decide to stop doing.”

This could provide a way into the country for some U.S. firms who see these voids as gaps they can fill. For instance, Big Law firm Skadden, Arps, Slate, Meagher & Flom views the slowdown in deal making as a chance to expand across Europe, according to Pranav Trivedi, partner and head of Skadden’s London office.

Luckily for law firms, investors will always be looking for distressed assets in a downturn they can snap up cheaply, providing a boon to firms regardless of headcount or the salaries of associates. Kon Asimacopoulos, a restructuring partner at Kirkland & Ellis LLP in London, says the firm is already seeing a “material uptick” from distressed companies calling on lawyers to help them restructure. He predicts this process is just getting started and will likely peak in the first half of 2023.