Will an all-equity model overhaul galvanise DLA Piper's partnership? Georgina Stanley and Simon Petersen report

Second time lucky? Roughly a year after putting plans to move to an all-equity partnership on the back burner, DLA Piper appears to have changed its mind, with the firm once again planning a major overhaul of its partner ranks.

The proposals mark a significant departure for the firm, which to date has been well known for its leveraged partnership – at the close of the last financial year, less than one third of the 628 partners in the international profit centre sat within the equity. The remainder are split relatively evenly between a junior and senior fixed-share equity rank, with both sets to go if partners approve plans to introduce an all-equity partnership.

With the consultation due to start in the coming weeks, any change is likely to come into effect from the start of the new financial year in May 2012, following a vote of the partners early in the New Year. Should partners agree with the plans, the international limited liability partnership (LLP), which comprises the European, Asian and Middle East practices, will be more in line with colleagues in the US, where 275 salaried partners were asked to contribute up to $150,000 (£95,000) each in late 2008 in return for a direct stake in the firm's profits.

DLA's management is selling the move as a way to motivate partners by granting them a direct share of the firm's profits as well as an equal vote in the firm's decisions. As important, it will align the incentives for all partners, which can come into conflict in leveraged partnerships during tough trading conditions. The high-leverage model saddles a firm with higher fixed costs and means equity partners can see their earnings fall while junior partners have their remuneration guaranteed, potentially provoking internal discord.

Andrew Darwin (pictured), DLA Piper's managing director of groups and services, comments: "Our remuneration system aims to reward partners for performance, not status, and that will continue. Our aim is to improve the link between performance management and remuneration so that partners are confident that they will be rewarded for achieving their agreed objectives."

Darwin says that changing the structure will help DLA retain junior partners who may to date have opted to leave rather than wait to try to gain access to the firm's tightly-held equity. Equally, it will help deal with disenfranchised junior partners within the full-equity rank, as the firm concedes that some fixed-share partners currently earn more than some lower down the equity ranks.

UK managing partner David Bradley says: "There is some overlap in our tiers and we feel moving to one class of partner will help us with the overall considerations and interests of all partners. Does this mean that one group of partners will receive a pay hike at the expense of another group? The proposed system is not about that, it's simply about removing the gates that 
can act as an inhibitor under the current system."

Bradley says that it is also an advantage that the move will take the international LLP closer to the partnership structure of its US counterpart.

He insists, however, that the overhaul is not about generating capital for the firm. But there is no denying that with fixed-share partners thought likely to be asked for at least 50% of their current salary in order to join the equity, it will be a beneficial move for the firm. Assuming each of the fixed-share partners is asked to put in £50,000, it would generate more than £20m in cash, which some former partners suggest will be used to pay off debt, which in April 2010 stood at £53.7m.

And given that the firm 
operates a merit-based pay structure rather than a lockstep, there is no guarantee that the 
bulk of those joining the equity 
will receive any more than they already do in the present system, making it broadly cost-neutral from DLA's perspective.

As partnership expert Roderick l'Anson Banks comments: "The theory is that it will be easier to reward people by making them equity partners, but one has the feeling that it may not change much. With a merit-based system, if all you do is swap a fixed share of the profit at £150,000 for a merit-based profit share of around £150,000, how is that different?"

With the looming removal of the two fixed-equity tiers, DLA Piper is already drafting a new career structure with the help of its human resources department, which will be used to help partners progress through the remuneration scale. In addition to their annual remuneration review, partners will have a separate review every few years setting out clearly defined development goals.

However, getting partners to approve the plans may not be as straightforward as the firm is hoping. While management insists that there will be some safeguards in place initially to guarantee a certain level of remuneration, it is unclear whether it will underwrite fixed-share partners' current earnings. In the longer term it could certainly result in reduced earnings and increased risk for full-equity members.

As Addleshaw Goddard professional practices partner William Wastie comments: "Although there are benefits to having full equity, some fixed-share partners might not want the associated risk. While it will be sold as an opportunity to climb up the profit ladder and as a motivating factor to help increase the firm's income overall, it can also be used by firms to manage performance rather than just guaranteeing a certain income."

Another issue DLA is likely to face is how it deals with reporting profits per equity partner (PEP). Although in reality the top and bottom of the equity are likely to remain broadly unchanged, PEP is likely to fall sharply under the restructuring – a concern, given that many firms regard the ratio as their 'share price'.

As Darwin says: "We're going to be honest and open in the way we report PEP, while also making sure that we don't create a disadvantage for the firm. The whole purpose of the proposed change is to improve the firm's overall performance by aligning the interests of all the partners."

The disadvantages mean that partnership advisers are not expecting to see many firms lining up to follow DLA's lead in moving to all-equity. As Wastie concludes: "Going the all-equity route is obviously easier to do in more profitable firms because if there is sufficient income to share around, the existing equity partners won't feel their interests have been diluted. I can't necessarily see a huge amount of current demand in this market outside the magic circle and the successful smaller boutique practices."

DLA Piper International: in numbers 2010-11

Revenue £604.9m
Average PEP £563,900
Total partners 628
Total equity partners 200
Highest-paid partner for 2009-10 £1.627m, up from £1.4m

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An equitable life – market reaction

"By being all equity it encourages people to take a longer term view, with everyone working together as one team towards the common goal of making a firm as profitable as it can be. And you don't have a whole lot of partners trying to step on each other to get to equity. But on the other side of the coin there are some advantages to having a salaried partner rank. It's a good way to motivate people, making them partner but still having them aim for equity. It also helps with clients because you can charge more people out at a higher fee. Also it's a good way to massage a firm's PEP results because you can effectively leave out half of a firm's partnership, which makes them look really profitable.'
Senior partner, top 50 rival

"During the consultation process it was something that partners said they wanted looking into and now here we go. It's still in the very early stage but it is being greeted as a positive change. I think more and more firms are going to look to do it."
International partner, DLA Piper

"DLA is quite unusual in that quite a few other firms are de-equitising at the moment. We have a great partnership here and a very large one at that – what the firm is trying to do is to align everyone philosophically. Personally, I just don't know if this is necessarily the right move. For me, it is all about the implementation rather than the philosophy."
Practice head, DLA Piper UK

"I know the old DLA structure was unusually tight on equity and younger partners would often come loose out of frustration. It's probably a very sensible move for them considering its high turnover rate of partners."
Partner, Pinsent Masons