Changing lockstep: A review of partner remuneration in the UK

Over the last few years, due to the globalisation of the legal market, top-class UK firms have been altering their partner remuneration models and, in some cases, breaking lockstep for big ticket hires. Many argue, however, that it is now time for a more drastic overhaul of firm lockstep structures where more competitive and lucrative systems are implemented that will bring UK firms in line with their fellow global elites.

The London legal market is becoming more competitive year on year, due to the continued influx and expansion of US firms as well as a host of non-legal firms who have been granted Alternative Business Structure licenses. These entrants offer attractive alternative options to many partners looking for new opportunities in an alternative, and arguably more commercial environment. Therefore, UK firms are coming under threat, particularly due to the evident gap in profitability compared to their US counterparts.

The last of the UK’s law firms to adapt to this new reality was the Magic Circle. Whilst they have begun to take on some aspects of performance-based remuneration, such as Freshfields’ second-tier lockstep ladder and Clifford Chance’s addition of ‘superpoints’, it may be necessary for Magic Circle firms to radicalise their models to continue to attract and retain star performers. There has been some evidence of this, as Freshfields broke their lockstep last June to take on Kirkland & Ellis high yield partner Ward McKimm.

Freshfields are leading the magic circle in the move away from the lockstep model and it will be interesting to see how the other firms react. Due to obvious challenges the magic circle face in considering a complete overhaul of their partnership structures, it is not surprising that they have stopped short of this. They are instead restructuring the bottom of the equity and adding gates rather than adopting the US compensation mentality in its broadest sense.

Although the Magic Circle have a very secure market position in London, entering the US market and addressing the nature of how they compensate their partners will be a challenge. Freshfields have certainly paved the way with their strategy to enter the US market. They have shown they are not afraid of making high-profile hires in establishing a reputable footprint by hiring a three partner team in 2014 from Fried Frank in New York, which included their the firm’s global capital markets practice head, Valerie Ford Jacob. As law firms tend to follow market trends set by others, we predict that 2016 could see other Magic Circle firms possibly following suit in this space. Clifford Chance in particular have also amended their lockstep to become more flexible and as such, are capable of making the same headway across the Atlantic.

The Silver Circle have been more ambitious with regards to the flexibility of their models, introducing modifications to their lockstep models much earlier. However, given their market position, this strategy forms part of a more protectionist perspective, as they struggle to retain many of the best performers and a modified lockstep allows them to compensate top earners more effectively. Nevertheless, even with significant changes to their remuneration structures, second tier firms will continue to struggle in attracting big ticket hires as they do not have the profitability to compete with Magic Circle or US firms.

Whether we are discussing Magic or Silver Circle firms, it remains to be seen what impact these foreseeable changes could have on firm culture. It is well-known that operating an eat-what-you-kill model intensifies competition within a firm, and has the potential to discourage teamwork and collaboration, something which has been fostered by top UK firms since their outset. Law firms have also worked hard to implement favourable agile working policies, but the implementation of a merit-based system could risk creating a work-life balance adverse to what they are trying to achieve.

It seems likely we will be seeing more changes to many firms’ lockstep structures over the coming year and Linklaters recent partner vote on assessing its remuneration process is testament to that, with the firm voting to maintain its lockstep structure. The varied approaches by each of the Magic Circle firms will show us over the course of the year which structure proves most successful. It could be seen that Freshfields experience fallout from their second tier after having made significant changes. Conversely, Linklaters’ lack of mobility could make their top performers vulnerable to US firms. Whether partner remuneration is amended for defensive or attacking purposes, a law firm without the ability to retain and indeed attract leading talent will face difficulties in an increasingly active lateral recruitment market.

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