Earlier this week, we announced that we would freeze the salaries of our legal and non-legal staff in London and in several of our other offices. It was not an easy decision but it was one that we felt was appropriate and proportionate, given the unusual and exceptionally difficult market conditions.

Although law firms are sometimes able to stay reasonably busy even during challenging times, they are certainly not immune from the difficulties faced by other sectors.

For our part, we have been fortunate to be active in many of the biggest restructurings and disputes around the world. We have also been heavily involved in assisting governments, public bodies and financial institutions as they consider critical financial assistance measures and regulatory reform.

These mandates have been highly challenging and stimulating and we feel privileged to play a role. Still, this work will not fill the very deep hole created by the broad drop off in transactional activity — a drop off that should make 2009 one of the most challenging years that we have seen in a very long time.

We are not alone in facing hard times. There have been an unprecedented number of layoffs by law firms, with approximately 3,000 announced redundancies in the UK alone. Many more layoffs have occurred in the US, where we also saw two well-known law firms become insolvent at the end of last year. This may not seem dramatic compared to what the banks have undergone but it is a very big deal for law firms, which tend to be conservatively run.

As are most firms and companies, we are paying close attention to our cost base. It —and indeed the cost base for the entire legal sector — has risen significantly over the past few years. Our average overall remuneration for associates in London (both salary and bonus) increased by more than 20 per cent from 2006 through 2008. There were also significant increases in average remuneration of our non-lawyers.

We and other law firms were able to afford these increases because of the unprecedented pace of transactional activity that existed prior to the financial crisis. This level of activity meant far greater profits for the law firms but also, of course, far greater competition for people. We found ourselves competing not only with other law firms but with banks, consultancy firms and private equity houses. Moreover, significant demands were placed on all of our people and it was difficult for anyone to achieve a reasonable work/life balance. All of this led to rising pay.

The world we now find ourselves in is very different. In the short term at least, there will not be as much legal work as in the recent past and, understandably, law firms will come under increasing client pressure to manage costs.

Many firms in the US responded to that pressure by reducing overall associate remuneration at the end of last year. Those firms cancelled a one-off bonus paid in 2007 and halved another bonus that had been payable for several years. The net effect of the second measure was broadly equivalent to a salary freeze. Other firms adopted and continue to adopt salary freezes.

We knew that putting a brake on salaries, particularly taking the lead in the “magic circle”, was bound to attract comment. Law firms are traditionally wary of being the first, but we felt that it was the right thing to do.

We considered a number of factors in our decision, in particular overall fairness, the effect on jobs, maintaining client service and our position with clients.

We expect to have a successful result for our current financial year, which ends in April, mainly because of strong activity earlier in the year and very favourable currency movements. The trend over the last four months, however, has been very clear and we expect much more challenging results next year with partner profits down materially.

We are doing our best to avoid redundancies or, at least, to minimise their extent. We cannot provide any guarantees in this respect but we are conscious that it is very difficult for those made redundant in this market to find other jobs. We had some redundancies a couple of years ago and it seemed that everyone who wanted another job was able to find one fairly easily. It is different now.

Finally, we have been very conscious of the pain suffered by our clients and are keen to show that we are not oblivious to their own difficulties. We may well have taken the view that we should be seen as a high-performance organisation (and we believe that we are) willing to pay salary increases to top people. We are indeed proud of our people, both with respect to their quality and their dedication, and we do have a flexible remuneration scheme that should reward those working particularly hard. But continuing with salary increases would seem to ignore the real world and would appear insensitive to our clients.

We are a resilient firm, which has experienced a great many shocks in the world and the markets since it was first formed in 1743. We have lived through difficult times in the past and we face this downturn aware of the challenges but confident that we will emerge with our reputation with both clients and employees as strong as ever.

Ted Burke is chief executive of Freshfields Bruckhaus Deringer, the world’s third-largest law firm

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