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Learning to live together – HSF strives to thrash out compromise on partner pay as key vote looms

It often seems getting a deal agreed is the hardest part – as in the case of Herbert Smith, which in 2012 agreed to combine with Australian leader Freehills – but working out those thorny integration issues can make you long for the simplicity of a straight merger vote.

Almost 18 months after agreeing its union Herbert Smith Freehills (HSF) is still thrashing out how to make its combined remuneration system work, having originally been expected to agree a model in October that would see the combined firm move to a variant of Freehills’ aggressively modified lockstep.

Four proposed models that were put forward in October failed to win support, leaving the firm searching for an acceptable compromise. One sticking point were proposals to introduce discretionary gates, which displeased London partners wedded to Herbert Smith’s more conservative lockstep regime.

Partners contacted by Legal Business last week indicated that meetings were being held on Friday (15 November) and today (18 November) to finalise proposals for an imminent vote. The official line is that it will take place ‘by mid-December’.

With the issue generating strong feelings at the legacy Herbert Smith partnership, there has been talk that the firm will move to a lightly modified lockstep half way between the legacy firms’ systems. The twist in the tail is the idea that legacy Freehills would retain some scope to pay bonuses for star laterals and high billers that would not be used by legacy Herbert Smith. The unusual move – which is viewed as a compromise to bridge the different sides – would mean the two firms would operate a largely integrated pay model but with limited carve outs for the Australia side of the business.

Legacy Herbert Smith’s lockstep has fixed share partners serving four years before making it onto the equity ladder, which runs from 43 to 100 points. Freehills operates 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 means 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 two firms already moved to a single profit pool when the merger went live in October 2012, so have yet to report net income for a full financial year.

One HSF partner commented: ‘Any time you touch remuneration it’s going to be a touchy subject. It forced both sides to think what’s good and what could be better under their respective systems.’

Another partner at the firm comments: ‘It [remuneration reform] was all looking a bit of a fudge last time I looked.’

However, supporters of this compromise see it as better than the two sides simply maintaining fundamentally different ways of rewarding partners.

The remuneration talks come as the firm also prepares to vote on its new chief executive or joint chief executives by the end of the year, as David Willis and Gavin Bell step down in April 2014. One partner said that given the geographical spread of the firm, they expect that the role will continue to operate on a dual basis. 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.