HSF brings in new powers to reward top performers as partners vote through lockstep extension

Herbert Smith Freehills (HSF) partners have voted through changes to the firm’s remuneration system, which will extend the top of its lockstep in an effort to attract and retain top talent.

The firm’s star performers will now be able to move above the previous 100-point top of lockstep into an ‘extension zone’ reaching up to 130 points.

Partners approved the changes earlier this week, after receiving two weeks to consider the proposals. The changes will come into affect from 1 May 2018.

The firm’s core lockstep runs from 43 to 100 points, and management has had the ability to hold or move down partners based on performance since moving to a modified system after the 2012 merger of Herbert Smith and Australia’s Freehills. Prior to the tie-up, Herbert Smith operated a pure eight-year lockstep.

While HSF said there would be no changes to the balanced scorecard criteria by which partner performance is assessed, it is expected that the firm will ramp up its focus on performance, with more emphasis placed on what partners are bringing into the business as opposed to their length of service.

One partner said: “We want to protect the culture and good processes from the past, but we also have to modernise and make the firm progressive. We only envisage a few of the most outstanding contributors going though into the extension zone.”

The change comes after a series of partner departures for the firm in recent months, with many leaving for better-paying international rivals. Energy co-heads Anna Howell and John Balsdon quit for Gibson Dunn & Crutcher and Latham & Watkins respectively, while last month Cleary Gottlieb Steen & Hamilton recruited London litigation partner James Norris-Jones.

The firm’s most recent LLP accounts, filed in February, revealed that the best-paid partner for 2015-16 received £1.6m.

One London partner said: “The world’s changing – nobody’s models will look the same in a decade. I think we’re doing the sensible thing.”

Another added: “For me, I think this is a sensible, moderate and relatively straightforward change. However, it is how much money people get paid and did need careful consideration.”

According to one partner, one proposal considered was that the bottom of the ladder be brought down from 43 to about 35 points, although this was not taken forward.

Other considerations had included introducing lower lockstep ladders in certain offices. The firm already operates a separate ladder in Australia and Johannesburg, which runs from about 30 to 80 points. No different ladders for other international offices have been introduced.

In a statement, the firm said: “We have introduced some new elements of enhanced flexibility. These include a wider spread of equity positions on our ladder to address different levels of contribution.

“The changes ensure that our remuneration system continues to support the business as we implement our global strategies, improves flexibility to reflect the different markets in which we operate, and incentivises teams to deliver the best service from the whole firm to our clients.”

The firm operates a partner bonus pool, which allows up to 5% of profits to be used to boost pay for star performers. Bonuses will now be paid out in two instalments annually instead of four, with no change to the size of the profit pool they come from.

A number of other major UK firms are currently pushing through changes to their lockstep, including Freshfields Bruckhaus Deringer, which recently overhauled its remuneration system with the introduction of a new single ladder that will enable top performers to make six times more than those at the bottom. It will see all partners joining the lockstep at 12 points, with a new top of lockstep rising to 60 points.

The core ladder will run from 12 points to 40 points, with everything above this only applying to star performers and those in competitive markets such as New York.

Clifford Chance, meanwhile, is ramping up its focus on partner performance with more rigorous appraisals that will more closely tie partner pay with performance than ever before. The appraisals come on the back of changes to CC’s lockstep, introduced in May, which stretched the top of the lockstep and recalculated profit units.