Allen & Overy, one of London’s largest law firms, has started a bidding war for junior lawyers after announcing a 15 per cent salary rise and the introduction of a new bonus scheme that could see top performers pocket £200,000 a year.

Salaries in the legal market have been relatively stable since the last bidding war six years ago, but this latest move will put immense pressure on other top-tier firms to follow suit.

Chris Hickey, a director at Robert Walters, a legal recruiting consultancy, said: "We haven’t seen pay rises on this scale since the mergers and acquisitions boom of 1999-2000 and just like then, as soon as one of the big firms does it, the others are bound to follow."

Clifford Chance, the world’s biggest law firm, would say only that it constantly monitored the market to ensure its compensation packages were competitive – a statement interpreted by recruiters to mean that a similar pay rise was imminent.

Allen & Overy’s announcement will be a boon to junior lawyers at Freshfields Bruckhaus Deringer, another of the "magic circle" of elite UK firms, which begins its annual salary review next month.

Junior lawyers are already in desperately short supply. Naveen Tuli, a recruiter at Lawrence Simons International, said large firms, struggling to cope with a mass of work generated on the back of a three-year mergers and acquisitions boom, had an "insatiable appetite" for well-trained young lawyers.

In addition to mainstream corporate roles, the strength of the prolonged M&A boom, which shows no sign of abating, has created a shortage of lawyers in supporting areas such as finance, competition and tax.

David Morley, managing partner at Allen & Overy, said the salary rise was designed partly as a response to increasing competition for talent from investment banks, eager to attract recruits with legal knowledge at a time of increasing regulatory scrutiny in the banking world.

The firm's package includes a 15 per cent salary rise for all lawyers below partner level. Newly qualified lawyers will see their pay increase to £63,000 with two-year qualifieds earning £80,500. Senior associates with several years’ post-qualification experience can earn up to £150,000.

In addition, all non-partners will be eligible for a new performance-related bonus scheme that can add a further £50,000 to their annual package.

Allen & Overy has also mimicked other firms by introducing a new grade of lawyer for those with significant experience who do not want, or have not been offered, partnership. Lawyers appointed to the new counsel role can earn salaries of up to £230,000 with potential for additional bonus payments.

Times Recommends

• Lloyds TSB wins vote for HBOS merger
• Bank of England discussed 2% rate cut
• Woolworths dives as it confirms takeover talks