Herbert Smith Freehills sizes up pay overhaul in 'huge' consultation with partners

Herbert Smith Freehills (HSF) is reviewing its partner remuneration structure in a move that could see the firm extend the top and bottom of its lockstep or introduce different ladders in international offices.

The overhaul was first mooted in 2016, with partners presented a number of possibilities earlier this year and asked to provide feedback.

The consultation is ongoing and no formal proposals have yet gone to the partnership.

Partners leading the review include members of the firm’s partnership board, chaired by senior partner James Palmer and the management committee, which is led by chief executive Mark Rigotti. A partnership vote will be required to ratify any changes.

“This is a huge consultation with all partners. This is not a make-or-break move away from lockstep – we are looking at a range of areas for flexibility,” said one partner.

Another partner said: “There have been options laid out to consider feedback on. Other firms are looking at similar solutions – it’s about looking at how you ensure fairness across different offices and how you account for variables.”

A third partner added: “Last year, they discussed the tools – do we need gates, do we extend lockstep, do we introduce bonuses, do some offices have a longer ladder etc? But nothing was resolved.”

Following the 2012 merger between UK firm Herbert Smith and Australia’s Freehills, the combined firm moved to a modified lockstep system. The ladder currently runs from 43 to 100 points, with a gateway after four years.

The firm also introduced a partner bonus pool, which allows up to 5% of profits to be used to boost pay for star performers.

Of the bonus, one partner said: “In reality, less is used, and it normally applies to around 15% of partners.”

The firm already operates a separate ladder in Australia and for some other offices, including South Africa.

The partner remuneration review comes as the firm is also looking at its associate pay structure ahead of next year’s annual pay reviews. It has already changed the way it calculates performance-related bonuses for associates, but it is now keen to tie overall compensation more closely to individual contribution.

In a statement, HSF said: “We are introducing more flexibility to be able to consider an associate’s wider contribution to the firm, alongside their performance and skills, when determining their compensation packages. We will be able to better reward our very strongest performers.”

HSF’s partner pay review comes as a number of UK firms look to overhaul their lockstep structures, in order to better reflect regional differences in profitability and boost profit available for top performers.

Earlier this year, Allen & Overy (A&O) ushered in changes to its German lockstep to make it harder for those in the country to move beyond 40 points on its 50-point ladder. It also moved down or froze about 50% of its German partners in a bid to improve profitability.

Fellow magic circle firms Linklaters, Clifford Chance and Freshfields Bruckhaus Deringer have also made changes to their lockstep in recent years, or been cracking down on performance in specific regions such as Germany.

HSF declined to comment on the partner remuneration review.