Nathalie Tidman assesses the Magic Circle firm’s high-stakes partnership shake-up
‘Freshfields has overhauled its partnership for two reasons – to mollify restive partners in leveraged finance and private equity – and to make it moderately easier to recruit in the US,’ notes one former partner. ‘It’s insufficient for both of these purposes.’
And that really is the $6m question for one of the City’s oldest and most prestigious legal exports. There are plenty of London peers that have deployed similar lockstep pay models but it was Freshfields Bruckhaus Deringer that raised the model to an article of strategic faith. As such, the vote that concluded on 14 November, ushering in the most aggressive shift from lockstep by the Magic Circle, carries huge symbolism.
The overhaul will see Freshfields’ equity ‘ladder’ widen from 17.5-50 points to 12-60 points, meaning top earners can earn five times that of junior partners. Within that will be a ‘core ladder’ running from 12-40 points, on which the majority of partners will sit, progressing at two points annually on a 14-year track. There will be three discretionary gates, at 22, 30 and 40 points.
As part of a rebasing of the firm’s equity, profit-per-point is expected to rise to more than £40,000 for 2017/18 and at least £50,000 the following year as points come out of circulation. Privately some partners talk of comfortably exceeding £55,000-per-point for 2018/19, potentially pushing plateau earnings for a select few to the £3.5m region. Not much more than 5% of its partners are expected to progress past the 40-point gate, though this camp will likely include a handful of City names in corporate and private equity.
There have been emphatic denials, however, to claims that there was pressure for the new plateau to go as far as 70 points.
The model will hand management huge control over partner remuneration, leaving Freshfields with a model far closer to the more profitable US rivals that it is struggling to compete with on the global stage.
It also ends the derided mishmash of deals that Freshfields had struck with a 10-30-point ladder for a disparate group of support practice areas and partners in secondary markets while a group of primarily New York law partners had been paid over 50 points. In contrast, all partners will be accommodated under the new model.
Clifford Chance, Linklaters and Allen & Overy have all introduced changes to their partnerships in recent years, albeit at more modest levels.
The politics and timing of the shake-up are, however, particularly sensitive for Freshfields. The firm had faced calls for reform in 2015 during its leadership election when contender Simon Marchant argued Freshfields had to make a far more substantive break from lockstep. Ironically, this push was defeated by the winning senior partner candidate Edward Braham (pictured), who pledged to preserve the status quo.
Freshfields is also trying to reposition after a poor financial performance in 2016/17 and a pedestrian run of growth over the last decade, while the return to fee-earning of co-managing partner Chris Pugh in the summer amid internal tension further unsettled the firm.
With a growing consensus that radical measures were required, Braham shifted position on lockstep by the early summer as proposals were produced. Braham then sought to win support among the foreign offices instinctively wary of the shift after the model was first presented in September.
The message internally is that Freshfields has at last made an emphatic statement and can now press on with its strategic goals.
While there will be those who question the handling of the firm’s senior leadership, the message internally is that Freshfields has at last made an emphatic statement and can now press on with its strategic goals. That will mean achieving dramatic growth in the size and quality of its US practice in three-to-five years.
Notwithstanding a handful of undesired departures from Freshfields in recent years, the firm has largely retained star performers. Notable exceptions include real estate finance partner Jonny Birks, who went to Kirkland & Ellis last December, following finance partner Michael Steele. The productive Steele had acted as relationship partner for The Blackstone Group and Goldman Sachs. Other significant losses saw well-regarded restructuring partner Sean Lacey join Kirkland, while New York-based Michael Lacovara jumped ship to Latham & Watkins last year, six months after being appointed as executive partner.
The additional challenge for Freshfields is to regain its momentum at a time when it is still striving to reshape elements of its business, notably in its top-tier German team, which is expected to shed 20 partners in the next two years.
The good news is that even many battle-hardened rivals believe the firm has taken a credible step. ‘I don’t think it’s too little too late – there haven’t been that many people leaving,’ says one managing partner at a US law firm’s City arm. ‘If you are earning £1.8m and someone from a US firm offers you £3m, there’s a big difference. If you are earning £3m and someone offers you £3.5m – there’s not such a big difference.’
There is less confidence that the new model will be enough to bring in a flood of productive US partners and there will be much attention on how closely Freshfields tries to stick to a seniority-based track, given that the model is not technically designed to accelerate partners. The firm is expected to review the position of its partners for the start of the next financial year, with practice heads taking the lead.
However it plays out, you can trust Freshfields to handle it with customary understatement. One City veteran airily professing to have no interest in the shake-up as Legal Business went to press was also one of the partners credibly touted as being in line for a very hefty pay rise.
nathalie.tidman@legalease.co.uk
For more on lockstep see Ditching lockstep – better too late than never?