Kwasi Kwarteng, caught laughing at the funeral of the pound.
US law firm Akin Gump has introduced a cap on the foreign exchange rate it uses to set the salaries of its London lawyers, to avoid having to pay its newly-qualified solicitors in excess of £200,000 as the value of the pound plummets against the dollar.
The Washington DC headquartered-firm pays its London associates in line with the Cravath scale in the US, which determines that NQs are paid a salary of $215,000. The firm usually converts to sterling by adopting a floating spot rate at the beginning of each quarter, depending on the FX rate at the time. This equated to a NQ salary of £164,000 from April to June (when £1=US$1.3109 at the start of that quarter), rising to £179,000 for the July to September period (£1=US$1.2005), when the pound dipped.
As the pound plunged to a 37-year-low this week, Akin Gump's NQs were set to toast the government's mini-budget with the finest wines available to humanity. On current conversion rates, they stood to pocket a salary of over £200k for the final quarter of the year; almost three times the base salary of the Prime Minister. Or ten times that of some criminal barristers.
But in light of the tanking pound, a source told RollOnFriday that Akin Gump decided to "stop converting" salaries at the "actual FX rate" and has introduced a collar (1.2) and cap (1.5) "that hasn't been seen in years". The insider said the firm made an internal announcement on Monday, just a few days before a new FX rate was expected to apply.
Akin Gump's salary scale works out as follows (based on the 1.2 rate collar):
NQ & 1 PQE: $215,000 (£179,167)
2PQE: $225,000 (£187,500)
3PQE: $250,000 (£208,333)
4PQE: $295,000 (£245,833)
5PQE: $345,000 (£287,500)
6PQE: $370,000 (£308,333)
7PQE: $400,000 (£333,333)
8PQE: $415,000 (£345,833)
Akin Gump is not the only BigLaw US firm to use a collar and cap on FX rates when converting dollar salary into sterling. RollOnFriday understands that Kirkland & Ellis uses a collar rate of 1.25 with a cap of 1.63, adjusted on a monthly basis (or whenever staff are compensated). The collar rate puts Kirkland's NQs on a base salary of £172,000.
Other US firms take a different approach. Vinson & Elkins (which also adopts the Cravath scale) uses an exchange rate which is set in January of each year for the full 12 months of that calendar year. The firm typically calculates the rate using the average of the fourth quarter of the previous year, and does not currently have a cap or collar in place.
Vinson & Elkins (and other US firms in London which use a similar method) will therefore have a big decision to make in the new year - if they continue to adopt a set rate based on the fourth quarter, their UK NQs could be in for a bonanza pay packet in 2023, if the pound continues to be weak against the dollar.
Goodwin Procter is another firm which uses an annual exchange rate which is set at the beginning of the calendar year. It currently pays its UK NQs a base salary of £161,500.
If you're in the London office of a BigLaw US firm, spill the beans on how your firm calculates salary.