‘These firms don’t have their destiny in their hands,’ says one well-known partner at a US outfit, about the latest wave of firms moving away from traditional lockstep towards more merit-based pay. ‘They’re making these changes because they’re necessary to better chase competitors.’
The partner was speaking to Legal Business about magic circle firms seeking greater profitability and flexibility to reward star performers – but these comments do not only apply to UK players.
While UK firms have long been tweaking lockstep — as shown by Freshfields’ recent sweeping partner pay reforms, which removed any hard cap on potential earnings for top performers — some of New York’s elite firms are now also being forced to adapt to stay competitive.
Earlier this year, Wachtell, one of the last bastions of the old school partnership model, made what one former partner described as ‘radical’ changes to its lockstep.
From January this year, the firm stretched the ratio between top and bottom earners from 3:1 to 6:1, with one former partner telling LB that new partners now join the equity on roughly half the profit share awarded their equivalents a year earlier.
And the changes didn’t stop there. The ex-partner suggests the firm has moved to a ‘black box’ pay structure, meaning it has effectively ripped the heart out of its traditional lockstep model.
‘The committee decides [on your remuneration] and informs you of your units, and you don’t tell anybody else,’ says the former partner. ‘That’s a pretty radical shift.’
‘If you can make four times your salary at another good firm, you’re going to move’
While Freshfields and Wachtell have very different business models, peers suggest similar market forces have forced their hands.
The overhaul at Freshfields – which comes after years of investment in the US – has been driven by a need to improve profitability and boost pay for star partners, given its PEP of £2.3m lags the average of $5m at the world’s top 10 firms.
Wachtell has no such issues, with partner profits reportedly surpassing $12m. But even as the world’s most profitable law firm, it has seen a spate of exits, with partners lured away on lucrative multi-year deals.
Last month, Kirkland & Ellis hired the firm’s restructuring and finance chair Joshua Feltman, in a deal reportedly worth $80m over three years.
‘If you work in a firm and you love everything about it, you’ll be prepared to make a concession on your compensation,’ says one US partner – ‘but the concession can only be so big.’
‘If you can make four times your salary at another good firm, you’re going to move – that’s just the way it is.’
And once the exits have started, options are more limited. ‘Once people start leaving, you have to resize things – and that means pay moving away from lockstep,’ says one partner at a rival white-shoe firm, about Wachtell’s move. ‘Once you drift away from that, it’s hard not to end up where most firms are, which is where pay is effectively based on performance.’
‘Firms are desperate to be successful in the US, but they’re often three steps behind’
Wachtell’s move has come after Cravath modified its lockstep and introduced a 15% bonus pool in 2022, a change which followed the departure of dealmaker Damien Zoubek to Freshfields in 2021.
But even modified lockstep systems struggle to allow rapid progression for talented juniors. ‘It is difficult to compete with firms that have a model that pays with delivery, because young, high-performing partners will earn far more at these firms than at rivals operating even modified locksteps and incentives,’ argues one legal recruiter.
According to the FT, Wachtell’s leaders now have greater ability to shift points away from litigation partners and towards the dealmakers that it sees as integral to its future – which could help prevent departures such as that of M&A star Zach Podolsky, who moved to Latham & Watkins last summer.
When Freshfields senior partner Georgia Dawson spoke to Legal Business earlier this year about the firm’s move to effectively ditch lockstep, she explained that ‘sticking with a [compensation] system that doesn’t support your strategy doesn’t make sense.’
The changes at her firm give Freshfields greater buying power, allowing it to pay top performers as much as $17m annually, according to someone familiar with the overhaul. But hiring top rainmakers, as the firm did when it onboarded partners from Cleary and Cravath in the US, means it will need to continue to compete with ever-increasing pay packets.
‘Freshfields started wanting to be able to pay $10m, and now it’s $17m,’ says one US partner. ‘Firms are desperate to be successful in the US, and for the right reasons, but they’re often three steps behind.’
And, whatever the intention, such changes risk destabilising partnerships, potentially triggering departures even among those firms most want to retain. While firms increasingly claim changes are being made in order to nurture collaboration, profit distributions are a zero-sum game: ‘Greater distributions for some partners means less for others,’ points out one partner.
‘Pay variations can foster less than ideal behaviour’
In the months that have followed Freshfields’ most recent shake-up, its European teams have seen several notable departures, including a former global co-managing partner and a German PE team, both of which left for elite US firms.
One former partner says the exits were a result of the firm’s shifting priorities: ‘People in Europe are leaving because the firm has essentially taken European partners’ equity growth and invested it in the US for limited return.’
Another ex-Freshfields partner in the US, however, says this view fails to recognise how challenging and expensive the American market is.
And the firm’s progress in the US is undeniable. The US was the firm’s fastest-growing region in 2024-25, with revenue up 21% and North America now accounting for 21% of global revenues – the biggest percentage in the magic circle.
‘The key question for us was: did our existing system allow us to attract and retain the best partners?’ Dawson stressed in her recent interview. ‘And if not, what were our options?’
Several partners LB spoke to expressed sadness at Wachtell’s changes. ‘There is a lot to be said for the old model,’ one reflects, adding that firms are ‘now all just platforms. People are paid in such wide variations, which can foster less than ideal behaviour.’
Leaving sentimental attachment to lockstep to one side, everyone LB spoke to acknowledged the need for firms to change to stay competitive. ‘Any firm that isn’t evolving its compensation model – or seriously considering it – is not being honest,’ says one magic circle partner.
Will Wachtell need to make further changes? The ex-partner tells LB: ‘There’s room for more tinkering, but they’ve made the big change. They went from true lockstep and ripped the Band-Aid off.’
Wachtell declined to comment.
