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A carve-out before Christmas – HSF agrees compromise to (largely) unite post-merger partner pay

It was a long time coming but Herbert Smith Freehills (HSF) has finally agreed a compromise to unite equity partner pay just over a year after the union of Herbert Smith and Australian leader Freehills.

The deal will see the two firms combine their partnerships under a ‘global managed lockstep’, a break from previous attempts to usher in more radical performance-based rewards for the combined partnership.

As Legal Business reported three weeks ago, the firm has decided to allow legacy Freehills some latitude when it comes to how they pay their partners.

Both legacy firms will use the same core ladder but the limited carve-outs will allow the legacy Freehills side to pay additional bonuses to high billers or star laterals. A statement announcing the move described this as a ‘variable, performance-related component to the system that is specific to Australia partners above a certain point in the lockstep’. There will also be a common bonus pool to reward ‘exceptional partner performance’.

The new, more merit-based system replaces Herbert Smith’s rigid lockstep, though it will run to the same range as the legacy City firm’s current system, which runs from 43 to 100 points.

CEO David Willis told Legal Business: ‘We went through a sequential consultation process and ended up with one proposal that we put to the partnership. There were lots of ideas put forward during the consultation and some weren’t as popular as others.’

‘The vast majority of the remuneration system is common to both partnerships. The difference for the partners in Australia won’t affect a large number of people. The bonuses allocated annually to all partners will be modest.’

The percentage of the firm’s profit pool that will be allocated to bonuses for legacy Freehills partners is understood to be around 5%.

The firm required a 75% majority vote in each of its partnerships to get the new system through. The vote was completed last week. Partners’ performance will be assessed using a ‘balanced scorecard’ approach, the firm said.

The exceptions from lockstep will not be available to legacy Herbert Smith partners and according to the firm these measures reflect ‘the nature of partner remuneration systems in the Australian market’.

The unusual compromise was agreed after four earlier sets of proposals sent in October failed to win support. These included more radical measures, such as discretionary gates, which were unpopular with London partners. The new system comes into place at the start of the 2014 financial year.

The ratified deal has been viewed as a somewhat unwieldy compromise that was necessary to bridge the two legacy sides of the firm, which will raise questions for some over the degree of integration between the two sides. The two firms combined formally on October 2012.

Legacy Herbert Smith’s lockstep had fixed-share partners serving four years before making it onto the equity ladder, which runs from 43 to 100 points. Freehills operated a core ‘ladder’ running to 120 points, though up to another 40 points can be handed out as bonuses, which are typically given to top-performing partners and laterals. The Freehills models meant that partners can earn well over £1m, in comparison top of equity at Herbert Smith of £933,000 during the 2011/12 year, when the City law firm saw profits per equity (PEP) partner of £840,000.

The firm is also voting on its new chief executive or joint chief executives by the end of the year, as David Willis and Gavin Bell will step down in April 2014. Partners viewed as likely contenders include litigation head Sonya Leydecker, UK managing partner Ian Cox, global head of corporate Mike Ferraro and EMEA managing partner Allen Hanen.