Hogan Lovells model to maintain two profit centres but align partner pay

Structure would keep two accounting years; Lovells to move towards Hogan pay model

The combined Hogan Lovells is set to maintain separate profit pools and accounting years as part of the proposed structure to unite Lovells and Hogan & Hartson.

As partners at Lovells and Hogan met this week to discuss the planned transatlantic tie-up in depth, more details have emerged of the structure of the deal, which would see the two firms integrate governance and remuneration but maintain separate profit pools.

Partners at both firms received detailed information on the union earlier this month in time for Lovells’ annual partnership conference, which starts tomorrow (20 November) in Lisbon.

The proposed structure – inspired in part by big four accounting firms – would see the firms maintain separate partnerships in the US and UK/international. Lovells’ US partners would transfer to Hogan’s partnership, while Lovells would take on Hogan’s Euro practice.

The proposed structure will also likely create an umbrella organisation to allow for firmwide governance, branding and cost-sharing. A Swiss verein or co-operative have been cited as possible models for the umbrella entity.

The deal will also likely create an umbrella organisation to allow for firmwide governance, branding and cost-sharing.

Hogan would retain its December year-end and cash-accounting model, leaving the Lovells partnership with an April year-end and accrual accounting, which is standard in the UK.

Though the model will require the firms to maintain two partnership entities and would block direct profit-sharing, the firms are set to align remuneration policies, with Lovells moving closer towards Hogan’s contribution-based model for partner pay.

This means 85% of profits for equity partners would be allocated on a points-based system, covering sustainable financial and non-financial contribution to the firm over a medium-term basis. The points allocations will be reviewed every two years.

There would be a 15% bonus pool designed to explicitly recognise short-term contribution over a 12-month period. The bonus pool, which will be awarded on the same criteria as the equity points, will be reviewed annually.

The bonus pool is expected to be distributed relatively widely, rather than providing large payouts for a small group of rainmakers.

The range of the combined firms’ equity points is still undecided, though it is likely it will be wider than the 2:1 range used in Lovells’ current partnership, a modified 10-year lockstep ranging from 30 to 60 points.

The firms both argue that current criteria for rewarding partners are already substantially aligned as Hogan does not operate an ‘eat what you kill’ model directly related to billing, while Lovells has heavily modified its lockstep to reward contribution over seniority. There are also expected to be some minor adjustments to Hogan’s current pay model.

Changes for Lovells partners would be phased in over a four-year period from May 2010, with the lockstep system in place for an interim two-year period as new equity points are decided. The one-year bonus pool could be allocated from the end of 2010-11.

The combined firm would see Lovells managing partner David Harris and Hogan chairman Warren Gorrell take on the roles of co-chief executives until 2014 under the brand Hogan Lovells. Lovells senior partner John Young is set to become co-chairman alongside one partner from Hogan.

The firm would also maintain two operational centres in London and Washington DC.

The proposed union, which promises to create a top 10 global practice, is set to go to a vote of both partnerships by mid December. If approved it is due to go live on 1 May 2010.

For more analysis, see Editor’s comment: Something borrowed

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