Freshfields partners face profit share cut and drop to lower lockstep ladder

Freshfields Bruckhaus Deringer partners face having their profit share cut as the firm moves some partners to a lower lockstep ladder as part of ongoing plans to ramp up profitability.

Partners voted in a second tier lockstep ladder running from 10-30 points compared with the standard 17.5-50 points in late 2013, it has emerged, but its use has increased significantly since last year.

Many of the fixed share partners brought into the firm’s equity in 2014-15 came in on the lower ladder, with its use subsequently extended to previously full equity partners across the firm’s global network.

According to ex-partners, multiple partners began moving down to the second tier across offices including London, New York and Germany just before the management election hustings in June last year, with more expected to follow. However, partners in weaker geographies and practice areas are expected to be hardest hit by the profitability crack down.

“The really difficult discussions started to happen [last summer]. It has caused a lot of angst,” said a former partner. “They had had the ability to do this for a while,” he added.

“On the different track, partners are not selected on a merit performance basis. They are decided by reference to practice and geography,” a Freshfields partner said.

The really difficult discussions started to happen last summer. It has caused a lot of angst

Another Freshfields partner added that rather than moving to a lower place on the 50 point ladder, partners were being moved straight to the secondary ladder. “Everyone is an equity partner but there is also a lower capped level. They are not jumping around like they would in a US system,” he said.

News of the lockstep reshuffle comes after managing partner David Aitman told partners at the firm’s Paris partner conference in May last year that around 30% of the partnership were not contributing enough financially, according to sources.

Since this point the number of partners dropping to the lower tier has increased significantly from only a handful of isolated cases when the ladder was first introduced.

“They are taking partners on the higher lockstep and dropping them down,” a former partner said. “This was the current management’s plan: rather than change the lockstep or fire a lot of people they wanted to move a whole bunch down to the lower lockstep.”

In London one partner said “there is no way people are tinkering with points on the basis of performance in the corporate or litigation departments”. He added there could be groups capped at 30 points in other areas, such as parts of the finance practice.

It is unclear how many partners currently sit on the new lower-tier lockstep and how many of the fixed share partners elevated to the equity came in on this structure.

They are trying to get profits up on average to avoid partners going to US firms

According to Legal Week’s UK top 50 rankings Freshfields had 419 equity partners out of a total partnership of 424 partners during the 2014-15 financial year, compared with 390 equity partners within a total partnership of 426 in 2013-14. This increase in equity partner numbers helped contribute to the 7.5% dip in profit per equity partner (PEP) to £1.369m that Freshfields experienced last year.

“They all became equity partners but some are on a slightly different track,” a Freshfields partner said.

Legal Week reported in December that Freshfields’ German partners learned late last year that they would be undergoing a performance review.

The firm is looking to remove up to 500 points from the partner profit distribution in Germany – the equivalent of around 10 partners at the top of the lockstep.

The global performance crackdown is understood to be linked to Freshfields’ ambition to bring its profitability closer to that of rival US firms in order to grow its US business and keep star performers from moving elsewhere.

The firm went above its lockstep last year to bring in US partners in New York and London, following a similar move in Asia in 2012.

Ex-partners suggest the hope is that increasing the profit share for top performing partners by moving others down to a lower ladder will encourage stars to stay.

“I don’t think that they are moving people down the ladder just so that they can hand points to laterals. They are also trying to get profits up on average to avoid partners going to US firms,” one said.

Freshfields declined to comment.