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  • Writer's pictureAlex Gotch

LawyersWeekly - Is a ‘loyalty tax’ sustainable within the legal profession?

Article by Lauren Croft of LawyersWeekly – February 2023


Within a candidate-short market, some firms are opting for increased sign-on and other bonus schemes for top lawyers, in what’s being called a loyalty tax. But how sustainable is it?


As reported by Lawyers Weekly’s sister brand, Accountants Daily, employees that remained loyal in 2022 will now be looking for a financial boost to match the hiked-up salaries of new starters within professional services firms.


Following this news, Lawyers Weekly spoke to two legal recruitment firms to assess whether a loyalty tax exists within law firms — and how sustainable it is in the face of a potential recession.


In terms of a loyalty tax within the legal profession, Beacon Legal director Alex Gotch said that this is already a common occurrence.


“The law firms understand that they need to remain competitive with the external market and that their lawyers now have more choice[s] than ever. Over the last couple of years, most large law firms have revamped their remuneration structures upwards, in some cases by as much as 25 per cent, especially at the 2-6 PQE level. Law firms appreciate that they need to be on the ball with market changes and ensure they’re paying competitively with their peer firms.


“Within the top-tier firms, sign-on bonuses are commonplace; in fact, they’re expected. The mid-tier and smaller law firms are less likely to pay sign-ons, but many still do, especially for ‘in-demand’ skill sets such as finance and TMT. The impact of the significant gap between the supply of talented lawyers and demand from law firms, especially over the last couple of years, has followed classic economic principles: low supply + high demand = increased price,” he explained.


“This has translated directly into sign-on bonuses, as law firms compete for the top lawyers, and it is regular for us to receive sign-on bonuses of between $10,000 and $25,000 for our candidates. Prior to 2021, $10,000 would be considered a great result.”


Despite this growth, starting bonuses are not yet the norm within the Australian legal industry, nrol director Jesse Shah told Lawyers Weekly.


“However, due to increased talent shortages and competition for top talent, I have seen these bonuses become more common, especially within the larger top-tier firms in recent years. I also see these bonuses more prevalent in corporate and commercial law,” he noted.


“Unlike a lot of other industries, I feel the legal industry did not succumb as much as others to paying the unsustainable high wage demands to attract new talent; therefore, as we see ‘loyalty tax’ increase in other sectors, it is not as prevalent yet in legal as salary expectations of new joiners and current employees [have] been better managed.”


But with legal salaries reportedly slowing down, both Mr Shah and Mr Gotch said that other factors are likely to continue to influence the candidate market in 2023.


“Salary will always be a major factor in anyone making a move, but since the pandemic, I have now [seen] a massive shift towards candidates seeking more of a work/life balance lifestyle; therefore, culture, flexibility and hybrid working [are] now equally as important if not to some more important than just a salary gain,” Mr Shah said.


“I have seen candidates make lateral moves in terms of salary to move to a firm with a better culture and work-from-home flexibility.”


Similarly, Mr Gotch said that Beacon Legal’s candidates consider salary, work culture and the quality of firm and work on a more equal playing field post-pandemic.


“Post-COVID, many lawyers re-evaluated their life goals, and where previously they may have had one eye on progressing quickly and earning as much as possible, they now place more emphasis than ever before on achieving a work/life balance,” he explained.


“That said, wages are always one of the most important factors for lawyers considering a career move, and we do not anticipate that changing.”


However, within top-tier firms, Mr Gotch said that legal salaries are actually expected to continue to increase this year.


“We expect salaries to continue to increase within the top law firms in 2023, albeit at a slower rate than during the boom period of 2022. With the international markets going into recessive and downward cycles, we expect demand from overseas law firms to reduce, and therefore few Australian lawyers leave our shores,” he outlined.


“This should have a significant effect, reducing the domestic gap between supply and demand, which should contribute to slower wage growth, as fewer roles become available through attrition. That said, there will generally always be significant demand from Australian law firms, and they will continue to increase salaries to retain and attract talent.”


And whilst a loyalty tax may not be sustainable for all firms, Mr Shah added that as the war for talent continues, so will bonus schemes and salary hikes.


“I don’t think paying a ‘loyalty tax’ is sustainable; however, competition for top talent is now greater than ever. Therefore, even though talk of a recession looms, I feel ‘loyalty tax’ in the top-tier firms will still remain, if not grow,” he said.


“I see those large salary hikes for movers decreasing more and more; however, I do believe bonus still will stay relative. Firms need to take into account that retention of existing employees is the biggest priority of 2023. Retain first, hire second.”

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