Freshfields' lockstep gambit: has the firm gone far enough to keep hold of its rising stars?
Does Freshfields' long-term reward approach to its new lockstep leave the firm vulnerable to star partner exits lower down the ranks?
November 17, 2017 at 04:39 AM
4 minute read
Another day, another magic circle lockstep review, as the UK elite continue to flex partner pay to better compete with US rivals on both sides of Atlantic.
This time, Freshfields Bruckhaus Deringer has voted through a radical overhaul that returns the firm to a single ladder, with a longer structure enabling those at the top to receive roughly six times more than those at the bottom.
Ushering in a 60-point plateau worth about £3m should, on the face of it, be a big enough draw to protect star performers from the clutches of US interlopers.
The fact partners approved the overhaul almost unanimously, with 94% voting in favour, certainly suggests those inside the firm are happy with it.
But while the new system represents a radical change for the firm, closer scrutiny suggests Freshfields may have left a hole in its defence: notably; the shakeup may still not be enough stop high-performing junior or mid-level partners from leaving.
During the coming months, all of the firm's partners will see their performance scrutinised, with everyone repositioned on the new 12-60 point ladder by the start of the next financial year.
Only a handful are expected to be placed above the 40-point cap – equivalent to about £2m at today's profit estimates – that will represent the top of the lockstep for the overwhelming majority of partners.
On the plus side, the new approach rids Freshfields of the unpopular two-tier system currently in place which, in recent years, has seen the firm liberally move partners in less profitable practices and regions down to a ladder running from 10 to 30 points instead of the core 17.5-50 points.
It also formalises what happens at the top end, where Freshfields has made several above-lockstep deals around the world in recent years to retain talent.
In addition, by introducing the possibility of partners being moved down the lockstep at three gates, it also gives the firm more control than it has ever previously had to link partner pay with performance, without resorting to the dreaded 'tap on the shoulder'.
What it doesn't do, though – at least not so far – is give management the power to accelerate partners' progress upwards. Up to 40 points they will only be able to progress up the ladder by set increments, with this progress only altering for those held at gateways.
Given that the ladder is slightly longer than it was before (taking 14 years to reach the standard 40-point plateau) and that most partners will be entering the equity on less money than at present (even allowing for a rebased profit per point figure of roughly £50,000 compared with £40,000 at present), there's an obvious weak point.
Most partners in their mid- to late-40s – ideal prey for acquisitive US firms – will not yet have reached the 40-point plateau, and there is no flexibility in the new system to change their pay to counter this.
However, according to some inside the firm, this is all part of the plan. Freshfields wants to buy the long-term loyalty of its partners with the promise of rewards tomorrow.
Yes, partners with eight years or so under their belt would be able to make more money at a top-paying US firm, but those sort of moves come with more risk.
Stay with Freshfields instead, and the standard top of lockstep will give you the option of a comfortable £2m a year, with the possibility of 50% more for absolute stars.
In fairness, it's a premise that will probably hold true for most partners, even for those who will have lived through what must have been a fairly bruising few years at the firm, between lockstep downgrades and practice restructurings that have led to some exits.
But it is also a premise that looks like a calculated risk. One or two partners each year are likely to be tempted away from the firm by the promise of doubling their money right now, rather than in a few years' time. Certainly, anyone offered more than £2m is likely to have their head turned.
The question is: how many will go? Freshfields will have to hope that the promise of jam tomorrow will be sufficient to retain enough talent that the handful of inevitable exits each year will not be so painful.
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