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‘US firms have more buying power’ – Allen & Overy tight-lipped as partnership ushers in lockstep reform

The partnership of Allen & Overy has voted through reforms to its lockstep in a bid to increase rewards for star performers as market pressure from US competitors continues to take its toll on London’s big four international firms.

Partners voted through the changes last week after being presented with the proposal earlier this month. It comes at a time when the dual market pressures of the coronavirus pandemic and competition from US rivals on compensation show no sign of abating. A&O declined to comment on the reform but sources within the firm describe the key changes as the ability to stretch the top of the lockstep and accelerate high performers at the bottom of the ladder. 

One partner told Legal Business: ‘It is in essence a proper points allocation where people get a profit share in advance, so if you are a superstar, you know you will be getting more points going into the year. You know how much you’re getting, rather than being at the whim of a compensation committee.

‘There are not many places left that can claim to be pure lockstep and what we have already isn’t really lockstep. But if you tell partners at a Magic Circle firm that you’re taking away lockstep, they would be up in arms. This is just another iteration of lockstep.’

A&O’s leadership is unafraid of potential overhauls of its remuneration structure. Protracted and eventually abortive merger talks with West Coast firm O’Melveny & Myers prompted inevitable questions over how the thorny issue of aligning compensation with a US firm would be tackled. The firm did at least thrash out much of the detail on what major reform would look like during the O’Melveny process, including a model that could have paid a few select stars $8m a year, with the understanding the model could deliver $6m deals for a wider pool of high performers.

And it is true that A&O has historically gone further in the war for talent than Magic Circle peers, having the capacity to pay top performers above its core lockstep, with above-plateau deals and ‘eagle points’ bonuses.  Partners in London are rumoured on average to be on 20 to 50 points, with each point worth around £45,000 before eagle points are taken into account. A&O’s highest earners can take home $3.5m-$4m.

Although more flexible than peers, it hasn’t stopped partners shopping around for more lucrative deals. The O’Melveny deal collapse was not without collateral damage, with Alan Rockwell and Michael Chernick leaving A&O’s New York office for Shearman & Sterling just a month after A&O lost well-respected London corporate partners Simon Toms and George Knighton to Skadden, Arps, Slate, Meagher & Flom. That blow came only 10 days after merger talks collapsed.

More recently in July, New York banking heavyweight Cahill Gordon & Reindel hired Jonathan Brownson, head of Allen & Overy’s much-vaunted leveraged finance practice, and Jake Keaveny, high-yield specialist and partner.

Projects and energy head Gareth Price could hardly have taken the managing partner helm from Andrew Ballheimer at a trickier time, having been voted in in February, shortly before lockdown in London started in March. Yet he and senior partner Wim Dejonghe have clearly not let that upheaval get in the way of executing their strategy. For many in the City elite, the reform will be seen as the only logical solution to a niggling problem.

‘You have got to accept that US firms have more buying power in pure money terms and if you think that you’re going to lose a material amount of partners because of money, then you have to think of a way of closing the gap,’ concluded the A&O partner.