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Goodbye lockstep – HSF latest City leader to give richer rewards for rainmakers

Herbert Smith Freehills (HSF) has backed a shake-up of its partnership that will boost top performers’ earnings by a third, hiking plateau equity shares from 100 to 130 points.

The move substantially lengthens its core pay ‘ladder’ and paves the way for top City earners to take home well over £1.5m with bonuses. The overhaul comes just weeks after Freshfields Bruckhaus Deringer voted through similar reforms.

HSF’s package, which was voted through this week after proposals were put to partners late last month, means top earners will receive more than three times that of entry-level equity partners, who remain on 43 points.

Core remuneration can already be topped up via a bonus scheme that reserves 5% of profits to reward exceptional short-term contribution. With the bonus scheme, which is unchanged, partners can get annual awards of up to 30 points, potentially now giving top performers 160 points firm-wide.

The reforms build on a broader shake-up of HSF’s partnership model in 2013, which followed the 2012 union of Herbert Smith and Australian leader Freehills. The earlier reforms introduced considerable flexibility to Herbert Smith’s eight-year lockstep, though it maintained some differences between the partnership in Australia and the rest of the firm.

The new model will see the 43-100-point equity scale continue with a ‘presumption of progression’ for eight years. Beyond 100 points, seniority will be largely discarded as a factor in remuneration in favour of a more substantially ‘contribution-driven’ assessment.

The changes leave HSF’s partnership in Australia unaffected. There is a ‘presumption of progression’ up to around 78 points for Australia partners. Past that, high performers could already receive up to 130 points, reflecting the wider spread in earnings at Freehills historically.

While the firm maintains a lower equity entry point in Australia and South Africa, believed to be around 35 points, HSF will now implement the 130-point ceiling firm-wide, with the 43-point entry used in all other markets after proposals for a lower entry point in some other markets were rejected.

HSF said that the latest reforms, which will take effect in May 2018, are designed to improve flexibility. ‘The changes ensure that our remuneration system continues to support the business as we implement our global strategies, improves flexibility to reflect the different markets in which we operate and incentivises teams to deliver the best service from the whole firm to our clients,’ according to a firm statement.

While the reforms are a further step from Herbert Smith’s legacy pay model, one partner argued that the model remains a ‘modified lockstep’, stressing that HSF still avoids sharp annual changes in earnings in favour of a medium-term view of partner contribution. He commented: ‘Four years ago was the big change. This is useful additional flexibility but if you compare us to some US firms, this is still a lockstep.’

HSF’s most recent LLP accounts show its highest-paid partner took home £1.6m in 2015/16, a drop of 12% on the previous year, when this was £1.8m. The firm generated profit per equity partner of £760,000 in 2016/17 against revenues of £920.5m. HSF currently has 337 full equity partners, with 141 fixed-share partners, referred to internally as ‘below point’ partners.

The development certainly reflects the growing pressure on City-bred law firms to compete with US rivals frequently offering huge paydays for high-billing partners. London’s big four Magic Circle firms have all modified their partnerships in recent years to make it easier to retain and attract star individuals.