Worries that generous pay increases are being passed on to clients through higher charge-out rates are causing disquiet among corporate counsel. Michelle Madsen examines the findings of the latest The Verdict survey

Clients believe they are directly funding sharp rises in their advisers' profits and salary costs, according to new research that uncovers growing disquiet among corporate counsel at the level of law firm fees.

Seventy-three percent of respondents to the latest Legal Week The Verdict survey said they felt rising profits and assistant pay hikes at major UK law firms had been 'largely' or 'entirely' passed on to clients in the form of higher charge-out rates.

A further 27% believed clients had funded soaring remuneration 'to a certain level'. Not a single respondent in the poll of senior corporate counsel, conducted in association with Davies Arnold Cooper, believed the impact of rising adviser profits on their legal bills to be minor or non-existent.

The findings come just weeks after the latest round of salary rises for top firms were announced, with most major practices in London hiking pay bands for junior lawyers by around 15%.

The rises mean many UK firms pay their newly-qualified lawyers upwards of £64,000, while the London branches of top US firms are in some cases paying starting salaries of more than £90,000.

At the same time, partner profits have risen sharply this year across the top 50, with results so far showing average equity partner profits across the group will be up by more than 12% compared with 2006.

Claire Wardle, Royal Mail intellectual property and commercial services director, argued that it is the number of hours rather than the rate at which they are charged that corporate counsel should be looking out for.

"At least hourly rates are identifiable at the outset. The issue for me is more the number of chargeable hours actually being recorded," she said. "I object to an hour added on here and there without any concrete work product arising from that time. In many cases partners are controlling their own risk but passing the cost of this on to the client."

Clients also believe law firms have raised their charge-out rates substantially in recent years, with 68% of respondents saying that advisers had raised their rates by 6%-10% over the last 12 months. A quarter of respondents said rates had gone up over the period by more than 11%, including 9% who believed that rates had risen by more than 16% in a year.

Legal service inflation is also reflected in perceptions of hourly charge-out rates. Asked what the highest hourly rate they had come across for a senior partner at a major firm, 61% cited a rate of between £500 and £700 an hour.

However, more than a third of corporate counsel (36%) cited higher charge-out rates, including 4% who had encountered an hourly rate of more than £1,000 an hour, a figure that will carry great symbolic weight in the City.

Queried over what the 'going rate' is for mid-level associates, who typically handle the bulk of client work, 70% cited a range of £300-£400 an hour, with 18% citing a lower band of £200-£300. A further 11% put the rate at £400-£500.

Financial Times general counsel Tim Bratton said clients particularly objected to being asked to pay for the training of inexperienced lawyers.

"No client wants to be subsidising the war for young talent that the firms are currently undertaking in the City," he said. "Any honest managing partner will tell you that a solicitor does not become of much direct benefit to a client until they are around the three-year post-qualification level."

Bratton also argued that the hourly rate business model would not stand up to scrutiny in the modern business world if it were devised today.

He commented: "If law as a business model was starting from scratch and someone suggested charging clients on an hourly basis, the idea would be rubbished as unworkable. For smaller matters or discrete pieces of advice it is not modelled to provide value for money. One wonders how sustainable hourly rates are as a business model in the long term."

However, some company lawyers pointed out that leading commercial firms offered a high standard of service and stressed that fees were not out of line with other City advisers.

KPMG associate general counsel Christopher Arnull commented: "Legal fees can be very high for City transactional work. The major City law firms work very hard at delivering quality services and charge what the market will stand. There are other players in the City who charge substantial sums as well and law firm fees should be placed in that context."

The ongoing pay war in private practice has also led to fears that corporate counsel will struggle to recruit talented juniors as the flow of lawyers from private practice is effectively turned off by rocketing salaries. This comes despite the traditional attraction offered by moving in-house of better work/life balance and a wider range of commercial experience.

One recruiter said this year's salary hikes in private practice had already had a dramatic impact on general counsel's ability to hire.