With a history of being used in less profitable jurisdictions or as a way of extending the route to equity, salaried and fixed share partners have tended to be viewed as second class citizens when compared to their full equity counterparts.

In addition to taking a smaller share of the profit pool, fixed share partners usually have fewer rights when it comes to voting on partnership matters or having a say in how the firm is run, for example.

However changes ushered in last April following an HM Revenue & Customs (HMRC) crackdown on the taxation of limited liability partnerships (LLPs) have largely led to the demise of salaried and fixed share partners, as law firms move to avoid hefty National Insurance bills that now come with these statuses.

But what effect has the demise of the salaried partner had on their partnerships and on the status of the individual partners affected?

Changing status

The majority of firms affected by the HMRC changes chose to ask salaried and fixed share partners to contribute capital equivalent to at least 25% of their standard remuneration in order to ensure that they continue to be viewed as self-employed and therefore not making their firms liable for increased National Insurance contributions.

The effect of this influx into the equity has been notable at some firms. Freshfields Bruckhaus Deringer's ongoing profit drive is for example partially linked to the influx of fixed share partners brought into the equity in 2014-15.

At Hogan Lovells around 65 salaried partners were asked to contribute between £60,000 and £100,000. Asking someone to contribute £100,000 of their own equity (or more likely, their own debt) to a firm changes their position and their standing within the partnership. Whereas many salaried partners did not have much of a say in the running of a firm, once capital contributions have increased by such a margin, it is hard to deny such people a voice.

Many firms that asked for capital contributions increased the rights of the formerly salaried and fixed share partners within the partnership. Eversheds reformed the rights of its fixed share partners last year following a partner vote and a year-long consultation. Eversheds chief executive Bryan Hughes (pictured right) says: "The HMRC changes were the catalyst, we got the guys together at our conference in Rome and got their views on the current scheme. What they wanted was more engagement, more involvement in the business, greater transparency and linking reward and remuneration to contribution; it was a long and engaging process that resulted in the changes we made."

The firm elected to give senior fixed share partners the right to vote in elections for the firm's chairman, chief executive and board and buy into a profit pool worth up to 20% of their remuneration.

For the most part it appears that where fixed share partners have increased their capital contributions they have received increased rights within the firm and the partnership. Another UK law firm managing partner says: "We don't really differentiate between fixed share partners and equity partners from a partnership agreement point of view, with one or two exceptions we have equivalent rights for both categories of partner."

Variable share

At Watson Farley & Williams, which did not ask its fixed and variable share partners for a capital contribution, there has been no change to match the full voting rights of equity partners. The firm instead chose to give their salaried partners the option of having part of their remuneration tied to the global performance of the firm.

Chris Lowe, the firm's co-managing partner says: "[Fixed share partners] are informed of every proposal and have an ability to comment on that proposal and have input. They don't vote on everything, they vote on the election of the board, but in terms of profit sharing for instance they don't vote on that."

Lowe adds: "It is a clear intention of management that we want our [variable share] partners to become equity partners, it may be that some don't make it, but it's clearly a stepping stone to the equity."

The advantage of creating a tier of variable share partners is clear. It offers formerly salaried partners the chance share in the fortunes of the firm, fostering a collegiate atmosphere in a way that bonuses linked to individual targets never could. And it means that partners could see a very real increase in what they take home in the good times. Watson Farley and Withers, both firms with a number of partners remunerated in this way, saw revenue increases of 7% and 8% respectively in the last financial year meaning that their variable share partners could expect a healthy boost in income.

Effect on the firm

The effect of the capital call made by many firms is seen in their 2014-15 accounts. For example Taylor Wessing's 2013-14 accounts show that capital contributions from members increased from £1.87m in 2012-13 to £4.43m in 2013-14.

Accountant Pamela Sayers of Smith & Williamson explains: "The majority of firms went down the route of asking fixed share partners to put more capital into the business which therefore boosted the balance sheet of many firms."

However, despite the balance sheet boost, an increase in the number of partners with an equity stake could have negative financial effects. One of these is an impact on profit per equity partner (PEP). When Freshfields Bruckhaus Deringer reclassified its fixed share partners it saw a dip in PEP as a result. Freshfields managing partner David Aitman (pictured right) says: "We recategorised our fixed share partners and because PEP is calculated by dividing net profit by the number of equity partners PEP necessarily goes down. It doesn't change the profitability of the firm, net profit, how much each partner makes or how these fixed share partners are remunerated. It's just a governance change and helpfully it has harmonised the rights and obligations of all partners."