How can firms afford a 12.5% pay rise?

I didn't have a 12.5% increase in London NQ salaries from Norton Rose Fulbright on my bingo card, but both The Lawyer and Legal Cheek reported on the £120,000 to £135,000 base salary bump over the weekend

Whilst I'm pleased for the individuals involved, it's worth giving some thought as to how this increase (and presumably other firms shortly following suit) could be paid for

I've no particular insight on the specifics of NRF here, but there are only so many levers a firm can pull to fund a pay rise of this magnitude

It will ultimately be paid by some combination of clients, staff or partners, but there are some obvious and less obvious ways of achieving this

1 - Clients

Perhaps the obvious starting point, but my January review of ONS pricing data suggests the heat has come out of the price inflation of recent years, with the latest reading coming in at 4.6%

This would (just about) cover a 12.5% increase in fee earner salaries, but looks tight when firms will likely be absorbing 3-3.5% inflation in their non-pay expenditure as well

I'd anticipate greater churn from legacy clients on lower rates to new clients willing to pay higher rates - this can be an effective way to increase average rates

2 - Staff

Worth keeping an eye on billable hours targets and utilisation rates to compensate for higher salaries

I understand that the NRF bonus scheme kicks in at 1,500 hours, running to 2,500, but quite how the bonus ratchets through that wide banding could incentivise higher hours in the coming year

More subtle, is restricting hiring or replacing of leavers in order to drive team utilisation rates up; squeezing fee earner salary bands post-NQ; squeezing pay awards for business services; or delivering a greater proportion of work out of London (e.g. Newcastle, in the case of NRF)

3 - Partners

All else being equal, an increase in fee earner salaries will reduce the profit available to partners

Whilst some combination of (1) and (2) will mitigate this, a subtle trend in recent years is to reduce the number of equity partners (and therefore increase the profit each remaining partner receives) through a combination of de-equitisation of existing partners, or extending the path to new equity partners - a longer period of time spent at Senior Associate or Salaried Partner, for example

In all likelihood, firms are likely to fund their fee earner payrises through a combination of measures, but 12.5% is a strong opening gambit from NRF this year

As the Legal Cheek article notes, I expect we'll see the likes of Ashurst, Hogan Lovells, Reed Smith, HSF and Mayer Brown react to this in the coming weeks