Inflation - The Impact on In-House Legal Salaries

We are all very aware of the impact that rising inflation rates have had on our daily lives over the last few years. Inflation rates experienced a sharp rise following the COVID-19 pandemic and Britain's exit from the European Union, as logistical supply issues became more prevalent. They then continued to increase as the Russian invasion of Ukraine threatened UK energy supplies and caused unsustainable price rises in the cost of everyday essentials such as heating, food and fuel.

This perfect storm has created a very uncertain financial and political outlook for the country which businesses and individuals alike are still struggling to recover from. The impact has been felt differently by employers across a range of industry sectors, with those operating a broad and diverse portfolio are less affected than companies specialising in only one area.

Diversification for protection

When businesses have a diverse portfolio, their risk level is spread across a range of industry sectors, allowing growth in one area to compensate for a decline in activity in another. The economic benefits of spreading the risk do not stop at products and services either. 

Businesses that operate across multiple jurisdictions often employ legal professionals with a broad range of experience and expertise and are willing to pay a premium for this flexibility. Indeed, those lawyers with international experience are highly sought after, whilst the possibility of remote working allows these businesses to access highly skilled talent despite what would previously have been considered a geographical restriction.

The effect on salaries

The Great Resignation of 2021 created a severe shortage of legal talent whilst ongoing cost-of-living concerns prompted many businesses into a knee-jerk reaction of increasing salaries to compensate. Indeed, many leading law firms within the Magic Circle and beyond increased graduate salaries by record-breaking amounts, leaving businesses with in-house lawyers in an uncomfortable position.

Many organisations have been unable to match or exceed the salaries offered by firms in legal private practice. This is because gaining approval for increasing in-house legal salaries beyond accepted pay grades is a very sensitive issue across many industry sectors.

These businesses have largely reviewed their overall benefits package, determining the extent to which they could compensate for an inability to match competitors' salaries by increasing the soft benefits on offer. These soft benefits include remote working, improved flexibility, access to bonuses and paid professional training.

Long term forecast

It is unlikely that inflation will continue at its current rate. Indeed, a decline in interest rates should be likely in the near future. This will ease wage concerns associated with the increased cost of living, and perhaps neutralise any advantage gained by law firms who may need to consider restructuring or diversifying their portfolio to justify the increased wages to which they have committed during more challenging times.

It is likely that clients will, with increasing frequency, look for opportunities to streamline services, centralising work with trusted experts and seeking out talented legal practitioners with cross-border expertise. Law firms and businesses with in-house legal departments will need to bolster their workforce with appropriate experts to adjust to this changing requirement set.

Ultimately, the challenges of the past few years have been unprecedented. Businesses of all shapes and sizes have learned from them and implemented policies and practices aimed at minimising the threat posed by any such future event. 

It is likely that the impact of inflation on in-house legal salaries will not be as great going forward as has previously been the case. Any differences in wages will likely be compensated for by a more favourable soft benefits package.

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