Freshfields Bruckhaus Deringer has pushed through a wholesale overhaul of its partnership structure that will see top earners bringing home as much as five times its most junior equity partners.
The move – which was backed in a partners’ vote concluding today (14 November) – will see Freshfields’ core equity range widen from between 17.5 points and 50 points to between 12 points and 60 points, though the ‘core ladder’ will run from 12 to 40 points.
The comprehensive overhaul will usher in three discretionary gates, with the third gate allowing top performers to earn up to 60 points in a move aimed at helping the City giant counter the mounting strategic threat of leading US rivals.
The move is not only a decisive shift from Freshfields’ once-obsessive support for classic lockstep partnership but also aims to deal with an increasingly messy compromise in which the firm has brought in a mishmash of off-lockstep deals in recent years both above and below its core ladder. In addition to the core range, there was a 10 to 30-point ladder for a disparate group of support practice areas and partners in secondary markets while a group of primarily New York law partners had been paid above the top of its lockstep.
There will be two discretionary gates slicing the 12-40-point scale into three sections, with the third gate kicking in at 40 points. The model will hand management huge control over partner remuneration, leaving Freshfields with a heavily-modified lockstep or, on some readings, a largely merit-driven system.
The wholesale shake-up also sees its equity points re-calibrated, taking profit-per-point to over £50,000, pushing top earnings above £3m for a select few. Under the current model, plateau partners can earn up to £2.2m. One insider predicted the firm would initially have no more than 5% to 10% of its partnership above the core 40-point range.
Freshfields senior partner Edward Braham said in a statement: ‘We felt this was the right time to look closely at our lockstep. The partners have engaged, consulted and voted positively for the new structure which now cements our model for the foreseeable future. We are an ambitious, confident and aligned partnership and we are in a very positive place to make the most of the many opportunities we have.’
The firm had faced calls for major reform back in 2015 during its leadership election when a camp led by contender Simon Marchant argued that Freshfields had to make a far more substantive break from a traditional lockstep partnership based primarily on time served. Ironically, this push was defeated by the winning candidate Braham, who had pledged to largely preserve its current pay model.
The move makes Freshfields the top City firm to have made by far the most aggressive shift away from the classic lockstep model, though Clifford Chance, Linklaters and Allen & Overy have ushered in more modest reforms to their partnerships in recent years. The shift will give Freshfields far more ammunition to retain and hire top performers and build out its crucial New York law practice and also heap additional pressure on London rivals to consider more aggressive reforms. However, one partner at arch-rival Linklaters said that the firm had no intention of revisiting its remuneration model after last year widening its pay bands.
The vote comes as City firms are facing unprecedented pressure from US rivals for key partners in a number of product lines, including private equity, leveraged finance, funds and white collar crime. Freshfields itself has been through an unsettled period recently with co-managing partner Chris Pugh stepping down this summer amid leadership tensions and the firm lagging its peers in the 2016/17 reporting season. A growing number of partners have argued that the firm has been losing ground against key global rivals in recent years.
While there will be strained efforts to paint the shake-up as preserving Freshfields’ remuneration model, there is no doubt the City giant most wedded to lockstep has abandoned the approach amid intense pressure from its own rainmakers for a move far closer to that of US rivals. For most neutral observers, the shift at Fleet Street is a long overdue recognition that the legal market had fundamentally changed since the banking crisis at the expense of the Magic Circle. But the decision will send reverberations through the global legal market for years to come.
For more commentary on the firm see ‘What ails Freshfields? Time is running out for ‘The Last Champions’
For more analysis on the impact of US firms’ recruitment of Magic Circle partners see this month’s cover feature, ‘The Departed’ (£)