At least three top US law firms based in Hong Kong are currently planning to phase out Cost of Living Adjustment (COLA) benefits over the next two years, while others are considering doing the same. It is planned to reduce the payment by 50% in 2024 and to zero by 2025. At least one firm has announced the change across the home office, while two others appear to have made the decision internally but have yet to announce it to their partners and advisers. in Hong Kong.
Will this work? Time will tell, but history shows that these companies face an uphill battle to phase out the COLA in Hong Kong. This isn’t the first time companies have taken steps to curb COLAs. Similar plans have been used during previous recessions. The problem is that unless every company in the market stops the practice, partners will simply migrate from companies that cut COLA to companies that keep it.
If the current hiring slump lasts two full years, it’s conceivable that no company will see an advantage in keeping the COLA while others phase it out over two years and use the policy to attract outside talent. But a fall of this length, under both soft and hard work freezes lasting a total of three years, would be unprecedented. More likely, at some point in 2024, the hiring market will pick up in due course, restoring the tight supply dynamics that led companies to offer significant COLA allowances in Hong Kong in the first place. If this happens, companies will have a strong incentive to use COLA as a collection tool. And companies planning to stop paying it now may want to reconsider, especially when their star colleagues may be considering moves next year as their COLAs begin to phase out.
About ten years ago, two leading US companies in Hong Kong planned to have a three-year period for their COLA for their US partners, whereby the COLA would take effect in those companies’ Hong Kong offices only for the first three years. However, nearly seven years ago, as the scheduled end of the COLA for their star partners approached, both companies quietly continued to provide a COLA after three years. One of these two firms completely abandoned the idea of a three-year tail.
It’s no wonder companies are choosing not to pay significant COLA payments, especially in the current down market. Biglaw offices in Asia currently have very few associate openings, which is a big departure from the norm. Some companies see this rare hiring slump as an opportunity to make a change.
Cost of living adjustments. why biglaw offices in Asia pay US partners more than any other region
The market for US-qualified Biglaw partners in Asia has long been unique. As in other regions, Biglaw firms seek candidates with advanced academic credentials and transactional experience. But in addition, they look for local language skills, most often fluent Mandarin. This combination of characteristics narrows the pool of eligible candidates, and under normal market conditions, competition for the relatively limited number of partners who tick all the boxes is intense.
This is why companies have for many years paid so-called Cost of Living Adjustments (COLA) to US-qualified colleagues working in Asian offices. Describing these payments as COLAs is a misnomer because they bear no particular relation to the cost of living (which is usually about the same or slightly lower in Biglaw Asian markets than in New York). Furthermore, there are significant tax benefits for partners who land in tax havens such as Singapore and Hong Kong. This is true for both US taxpayers and non-US taxpayers, although the taxable income of the latter is much higher than the former.
Instead, COLA is more accurately understood as an increase in base salary, rather than tied to cost-of-living adjustments or cost-of-living in general.
How much COLA do companies pay?
Before I get into the numbers, let me offer some context about my background. I recently joined Lateral Link, but my close association with Biglaw offices in Asia dates back nearly two decades, and has completed over 500 attorney placements in Asia, mostly at top and second-tier US firms.
The table below shows the typical range of annual COLA (in USD) in Hong Kong. To keep things clear, I’ve listed the low, medium and high values, along with the number of firms paying at that level, for what we consider to be the top 20 US and UK law firms in Hong Kong. Please note that these COLA numbers are basic and do not include additional COLA allowances paid to colleagues with children (a minority of Hong Kong companies do). Furthermore, it is likely that by this time next year, only one company will be in the “High” range, with one of those companies considering a slight reduction in COLA and one of those companies planning to phase out the COLA. Outside of the many companies considering phasing out the COLA, there has been no move to lower the COLA below the current lows ($60,000 to $95,000) in the Hong Kong market. This is the COLA range for the top 20 companies in Hong Kong for over ten years.
| Location: | Low (11 companies) | Average (6 companies) | High (3 companies) |
| Hong Kong | $60,000 – $70,000 | $75,000 to $85,000 | $90,000 to $95,000 |
One can assume that the COLA is for Americans who move to Asia as expats. In the mid-2000s, when the COLA system was more mainstream and US law firms in Asia were very small, this was largely true. But the picture today is more nuanced, especially in Hong Kong, which is the most competitive market for partner recruitment.
COLA is typically offered to attorneys on the “US team” (eg, US Capital Markets, M&A, FCPA, etc.), which are usually (but not always) led by US-trained and qualified associates. Remember that the members of such teams are not necessarily American. Many partners are native to the region but qualified as US lawyers. So a native Hong Kong citizen with a US JD (and no US tax liability) will earn a COLA despite living in their home jurisdiction.
There are also many qualified UK and Australian colleagues in US companies in Hong Kong who work in US teams and receive COLA regardless of whether they are admitted to any US state.
Interestingly, a minority of Hong Kong-based US law firms provide COLA to only or most of their Hong Kong-qualified partners. These lawyers are only admitted to practice in Hong Kong and usually grew up in Hong Kong, or at least lived their entire legal career in Hong Kong. They work side-by-side with US-qualified colleagues who receive a COLA, and their companies want to retain them. Accordingly, the COLA in these select offices has effectively translated into an increased base salary for all associates.
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