Melinda Wallman looks at how US securities lawyers are enticed to the UK as a boom in high-yield debt work puts them in demand.
As companies worldwide turn to the capital markets as an alternative to elusive bank finance, high-yield debt has emerged as an essential part of the mix. In London, this has created a big demand for US capital markets lawyers, at a level not seen since the last high-yield boom of 2005 to 2007.
Law firms attempting to capture some of this market have been hiring laterally in London and moving specialist partners here from the US. This has led many firms to review their expatriate packages for US partners to ensure that they are competitive. After the fifth enquiry about benefits to our London office, Major, Lindsey & Africa decided to conduct a confidential survey to discover the lay of the land.
In 2008 (the most recent data available), US law firms employed 3,900 lawyers in London, their UK billings exceeded £1.2bn per annum and more than 100 of their local partners were earning £1m a year. At that time, many experts predicted the number of lawyers employed by US firms here would double within five years. While the global economic downturn has caused that forecast to be revised, the number of US law firms opening and expanding in London continues to grow. This year, Ropes & Gray opened its London office with a team from Freshfields Bruckhaus Deringer and White & Case, including two US partners, Michael Goetz and Jonathan Bloom; Latham & Watkins recently picked up a bank finance team from White & Case that included US partner Chris Kandel; Herbert Smith acquired talented equity capital markets lawyer and former head of Linklaters’ US law group Steve Thierbach; Allen & Overy hired high-yield specialist Kevin Muzilla from Milbank, Tweed, Hadley & McCloy; and Sidley Austin attracted US capital markets partner Bart Capeci from Allen & Overy.
In addition, several US law firms have transferred very senior partners from the US to assist with growth in this market. Most recently, Cadwalader, Wickersham & Taft, Sidley Austin and Paul, Hastings, Janofsky & Walker moved senior partners Robert Link, Mark Wiltshire and Philip Feder, respectively, to London from the US to lead focused growth campaigns.
IN THE BEGINNING
When US firms first opened offices in London in the 1990s, most transferred senior partners here. To compensate them for the upheaval and relatively high cost of living, most firms designed extremely attractive expat packages along the same lines as those offered by Fortune 500 companies. Twenty years on, London is a mature market for many US firms and extravagant rewards are no longer required to entice someone across the pond.
As a result, the typical expat offering in established US law firms’ London offices has evolved – from a separate package of benefits (either itemised or provided as a lump sum) to the inclusion of benefits in the total cash compensation for each partner and, in some cases, to no special benefits at all. However, even though this is clearly the trend, there are exceptions. For instance, we know of one case in which a firm moved through all three of the above stages, only to return to offering itemised packages. Why the reversal? Because the fi rm recently made a very strategic transfer of a senior partner from the US and that partner insisted on an old-fashioned package. The firm decided it was only fair to treat everyone in London the same, so it reintroduced itemised benefits across the board.
BASIC PLAN
To get a view of the bigger picture, we surveyed the top US firms in London about their expat benefits. Almost all of them offer a full corporate relocation package for partners who move to London. These packages generally cover reasonable moving expenses, which typically means air freight of most furniture and household goods, perhaps excepting grand pianos. Of course, in the case of a very senior or influential partner, such an exception would most likely be waived. Relocation packages also generally include short-term accommodation, brokers’ fees and storage.
Once settled in London, relocation benefits are replaced by expat benefits (see box, next page), which in most firms last at least five years. In line with the expat benefit policies of most investment banks, after five years a secondee is considered ‘localised’ – ie as having chosen to resettle in London. Like in banks, there are many exceptions to this general rule. The person loses all benefits, except international healthcare and tax assistance (which is discussed on the next page). All firms in our survey cover international healthcare for the entire family. CIGNA International is the most common policy.
Many firms provide US expat partners with a housing allowance, which covers the total cost of housing in London or pays the difference between the cost of housing here and in the US. Housing benefits generally top out at £160,000. In some cases, firms insist that housing allowances are only used to rent property and not to pay off mortgages, the underlying policy being that a partner’s time in London is intended to be temporary.
Similar policies exist when it comes to education. Many firms pay the full cost of pre-college education. Some, however, just cover the difference between the cost here and in the US. If lump sums are provided, they are typically based on fees at The American School in St John’s Wood.
CURRENCY AND COST OF LIVING
Firms were divided 50:50 when it came to providing US partners with cost-of-living adjustments (COLA). Half do not offer any type of adjustment whatsoever and those that do use different formulae to determine the amount. One firm gives a 7% to 10% uplift to all US expat partners to cover the difference in living expenses. Another bases the COLA amount on The Economist index. Some turn to companies like ORC Worldwide that survey expat pay practices and international salaries to help them determine the appropriate adjustment. Others base it on seniority.
Of course, cost of living leads easily into currency protection. This became extremely important in 2007, when the USD:GBP exchange rate moved between 1.8:1 to 2:1. At that point, if firms did not have some sort of currency protection, they introduced it. To help partners outside the US deal with fluctuating currency values, some firms have introduced voluntary hedging programmes, which fix the exchange rate for some or all of the distributions that are paid in dollars. Most of these programmes lock partners in for a specific time period, typically six months to a year. Some firms avoid these calculations altogether and offer a lump sum to help cover the currency differential.
TAXMAN COMETH
Another benefit that is exempt from the five-year policy has to do with taxes. Due to the difficult and double tax obligations incurred by US citizens working abroad, all US law firms here cover at least a portion of the tax preparation costs for their US partners (even after five years), and most offer some sort of tax subsidy as long as the lawyer is required to file multiple returns.
Many firms – and kudos to them for this – pay for their expat partners to meet with a tax adviser in the early stages of the relocation process, to help them figure out the best way to handle their income, expenses and reporting requirements. In most cases, they are obliged to use the firm’s preferred Big Four provider.
Most firms offer tax equalisation; a few offer tax protection. Firms that offer tax equalization ensure that expats pay approximately the same amount of total tax as they would have had they remained in the US – ie they will not be worse or better off, tax-wise, because of living and working in London. With tax protection, the expat can’t lose, but they could actually enjoy a windfall if the tax obligations in the new locale are lower (when moving from New York to Hong Kong, for instance). That is, of course, not the case when relocating to London, where taxes are now some of the highest in the world.
Together with housing, taxes constitute the biggest part of an expat package, with some firms paying more than £200,000 of a partner’s tax obligation.
One other benefit that is rarely, though occasionally, offered is income protection. This can mean guaranteeing a certain level of income while the partner is away and on their return to protect them against the loss of their local practice. Some firms guarantee a certain level of points for the time spent in London and for two years following the partner’s repatriation to the US. Of course, this is only viable if the firm’s compensation system is not lockstep. Firms with closed compensation systems have an advantage as they can easily roll expat benefits into an individual’s total compensation without anyone feeling that they received a raw deal. In our experience, relative compensation is much more important to partners than absolute compensation.
CONCLUSION
In the end, the factors that most influence a firm’s expat benefits package are the degree to which the firm needs US law expertise, and its overall strategy and stage of international development. Firms that have had an international presence for many years, and whose London office is populated mainly by UK lawyers, have been able to dilute their packages. A couple of these firms, which are among the world’s most profitable, have taken the view that their partners earn enough money via partner profits and that living in London is more of a privilege than a hardship – hence they have stopped paying benefits altogether.
On the other hand, if US law is crucial to a firm’s London strategy, such as in the current high-yield boom, or if a firm needs to transfer key players to spearhead growth, or if a US firm has not yet developed a standalone UK practice, then their expat packages need to be robust enough to entice quality partners and their families to make the move. The expat benefit policies of such firms will be designed to ensure that their US partners are better off in London than they would be at home.
BENEFITS FOR US EXPATS
US law firms in London that offer itemised partner expatriate benefits typically cover the following:
• housing/utilities/council tax
• schooling
• cost-of-living adjustments
• tax protection/equalisation
• currency protection
• home leave
• income protection
• healthcare
Source: 2010, Major, Lindsey & Africa, www.mlaglobal.com
MELINDA WALLMAN is the partner in charge of the European partner practice group at the global legal search firm Major, Lindsey & Africa.