Madeleine Farman reports on recent remuneration changes among the City elite
With the growing threat of losing star partners to aggressively-expanding US firms, the Magic Circle’s traditional remuneration models have come increasingly under pressure. Last month Linklaters voted through changes to its remuneration model, while at press time Clifford Chance (CC) was due to complete a review of where partners should sit on its lockstep in a bid to retain key contributors and manage under-performers, 18 months after voting through the last set of changes.
In August, Allen & Overy (A&O) broke its lockstep to bring in several partners from White & Case to its Manhattan office, led by its new global co-head of leveraged finance, Scott Zemser. Meanwhile, Freshfields Bruckhaus Deringer has put its US managing partner Peter Lyons and US M&A head Mitchell Presser on pay packages outside the firm’s traditional lockstep. The duo are believed to be outside of Freshfields’ 17.5-50 ladder, on between 65-70 points. Freshfields also broke its lockstep for star high-yield partner Ward McKimm in 2015, who joined from Kirkland & Ellis on a reported $6m per year pay packet. Going the other way, some Freshfields partners in the finance department in London have been shifted to a second-tier lockstep, which runs from ten to 30.
One US law firm leader claims Magic Circle firms are just ‘tinkering around the edges’ and need to be more upfront with what they are doing to their remuneration models.
‘Rather than pretending that it’s lockstep – you’ve got gateways and bonus pools and you’re moving people up and down the ladder – as soon as you start moving people up and down the ladder, it’s not a lockstep anymore. It’s a modified system where, if you are not careful, the rules aren’t clear. And you know what motivates people to leave? It’s not the pennies in their pocket. It’s relative fairness.’
However, A&O managing partner Andrew Ballheimer is convinced of the long-term benefits of the model: ‘It preserves the best of our culture, at the heart of which is a lockstep. It encourages partners to take a view of the long term and that pays off in terms of investments, whereas if you go to an eat-what-you kill model, it’s much more of a short-term system.’
A&O has a separate bonus pool on top of its lockstep, which runs from 20 points to 50. The firm added the pool in 2015 to entice leading talent and reward star performers.
Meanwhile Linklaters, which had a modified lockstep running from ten to 25 points, with country-variable ‘discounts’ used in some markets like Germany and Belgium (respectively equivalent to 90% and 70% of UK partners), voted through proposals in November that will double its lockstep points range in a bid to provide more flexibility in moving partners up and down the ladder. A gate will be introduced at 35 points and there will be five-year reviews for partners who have reached top of equity to make it easier to move plateau partners back down the ladder.
One Linklaters partner said the firm was ‘trying to flex the system, changing it a bit without really encroaching on the lockstep, just increasing flexibility’.
‘Lockstep encourages partners to take a view of the long term. If you go to an eat-what-you kill model, it’s much more short term.’
Andrew Ballheimer, A&O
CC is shortly expected to draw to a close a complete firmwide review to consider which partners will move up or down its recently modified lockstep. In 2015 the partnership voted to flex the structure so that exceptional performers could be moved up from 100 points to 115 or 130, while others could be brought down from the 100-point plateau to 70 points.
And while its Magic Circle peers make changes, management at Freshfields faces a dilemma. Senior partner Edward Braham ran his election campaign in 2015 on the platform that he would not change lockstep, while his rival Simon Marchant favoured reviewing the remuneration structure. As such, one senior Freshfields partner tells Legal Business: ‘We do need to change it, but it will be difficult for Edward and Chris [Pugh, co-managing partner] to do a wholesale review now.’
The partner adds: ‘Currency movements, which are inflicting some devaluations, are significant. That’s a specific jurisdictional issue for those paid in US dollars, which we need to do something about. I don’t know what we’re going to do about it, but it’s being discussed. But as far as I know, there is no wholesale lockstep review planned.’
Slaughter and May, which has the benefit of not having a US office to fill with star lateral hires, has a 2:1 lockstep model with those at the top receiving twice as much as those at the bottom. Partners can expect to reach plateau within ten years. While other UK-focused corporate firms such as Travers Smith have this year considered a review of lockstep but ultimately decided against making changes, Slaughters is adamant it will not change lockstep.
Senior partner Steve Cooke says: ‘It’s inconceivable we would move away from lockstep. The main benefit is that no-one is differentiated by their financial contribution with the effect of minimising unhealthy competition between partners. Partners have no qualms about sharing work with others when it is appropriate. It makes for more efficient working and a more collegiate environment.’
madeleine.farman@legalease.co.uk