Faced with seemingly endless turmoil in the United States, Clifford Chance is attempting to right its ship with some worldwide deck swabbing. Since its 2000 merger with New York’s Rogers & Wells, the London-based firm has lost more than 30 partners in the U.S., including such standouts as Kevin Arquit, Kenneth Gallo, and, most recently, James Benedict. Most left because of tension over Clifford Chance’s lockstep compensation system, which limits flexibility to reward overachievers. This year, aiming to improve its profitability and stop desirable partners from leaving, the world’s largest law firm has been conducting more rigorous partner reviews. Clifford Chance won’t say it’s pruning deadwood; instead, managing partner Peter Cornell explains that the firm is reinforcing its standards: “We must have an obsession with quality. It must be nonnegotiable.”

But will anything short of a radical attitude readjustment be enough?

Before the merger, the firms knew they’d have to resolve two different compensation systems: Clifford Chance’s lockstep, and Rogers & Wells’s model that rewarded business generation. With neither side willing to give up its system right away, they cobbled together a short-term compromise that allowed a handful of stars in New York and Washington, D.C., to be paid above the top lockstep rate ["The New World Order," November 1999; "A Marriage of Convenience," November 2001].

For the U.S. lawyers, there was another key element to the deal. To assure American partners that a lockstep-dominated system would be fair, the British firm agreed to conduct “rigorous” partner reviews and enforce an “intolerant” lockstep. (These conditions were stated in the merger agreement.) That, theoretically, would weed out underperforming partners or drop them down the scale. “It was a way to come up with a common set of expectations,” says one former partner. “Do we aspire to be the worldwide equivalent of Sullivan & Cromwell, or not? . . . You can’t bill 1,500 hours and say you want to be Sullivan & Cromwell.”

Management underestimated the resistance it would face from old-line partners in London, where the culture is not as driven by the bottom line. Cornell, who took over as managing partner in 2002, confirms that these reviews didn’t happen. “We tried and failed about three years ago to introduce a partner assessment procedure,” he says.

The firm’s failure to impose high expectations on all partners led to frustration in the U.S. For the firm’s last full fiscal year, which ended April 30, a partner at the top of Clifford Chance’s lockstep made less than $1 million. The firm ranked fortieth in profitability on The American Lawyer Global 100 list [November]. One problem is that most partners rise to the top lockstep level after nine years. As a result, nearly half of Clifford Chance’s partners sit at the top rung, diluting the profits at that level. (The firm has also recently been reminded that it’s vulnerable to poaching abroad. In November, Paris corporate partner Dominique Bompoint was lured to Sullivan & Cromwell.)

Cornell says that to succeed in the U.S. and globally, Clifford Chance needs to improve its profitability. The firm has been cutting costs, but also is focusing on getting partners to generate more revenue. For the current fiscal year, the firm has targeted an increase in profits of 25 percent, which would raise the top lockstep rate to $1.25 million. This would at least elevate it to the level of the most lucrative British firms.

Cornell says the partner reviews have been focused on quality, with billable commitments secondary. Does the process aim to weed out underperformers? “Not really,” Cornell responds. “That’s an issue that has to be dealt with, but [the reviews] are not actually related to that. It’s more focused on whether [partners'] personal goals are aligned with what the group is doing.”

The reviews didn’t appease at least one New York partner. In late October, Clifford Chance suffered arguably its most significant loss in the states when New York partner Benedict left for Milbank, Tweed, Hadley & McCloy. Benedict, a 55-year-old litigator, was not just a tireless worker with a huge book of business. He had led the firm’s management team in the U.S. and had been a visible booster for the merger.

Benedict, who started his career at Rogers & Wells 30 years ago, bluntly stated his reasons for leaving. “The British playbook doesn’t work [in the U.S.], or at least it needs to be modified,” he says, referring to lockstep. “I think that any change to lockstep is a huge threat to a big part of Clifford Chance.”

For Benedict and others, the turning point came last year when Cornell urged partners to approve a compensation system that would allow a handful of U.S. partners to be paid above lockstep for another five years. A majority of partners backed it, but it fell short of the two-thirds vote required under the partnership agreement. Instead, the firm continued to require the few New York partners above lockstep to be reconsidered every two years. Shortly after, Benedict told the U.K. publication Legal Business that a “Taliban” of partners was holding the firm hostage.

“I looked at the vote last fall as saying that the purity of lockstep was more important than success in the U.S.,” says Benedict, who was compensated above the top lockstep level. “It is really that [proposal] being voted down by a dissident minority that really triggered the exodus in [the] U.S.,” says Benedict. After the vote, a stream of top litigators left the firm, including U.S. litigation head Gallo to Paul, Weiss, Rifkind, Wharton & Garrison, and Leora Ben-Ami to Kaye Scholer. (Both had extra points above lockstep.) “I spent 15 years building what I thought was one of the very leading U.S. litigation practices, and I watched it blow apart in a very short time,” says Benedict.

“When we did the merger, I don’t think enough thought was given on either side-either side-to compensation,” concedes managing partner Cornell. “We didn’t understand how different the markets are. We did not think it out as thoroughly as we should have.”

Keith Clark, who was managing partner of Clifford Chance during the merger, and Laurence Cranch, the last managing partner of Rogers & Wells, declined to comment. Both have taken positions with clients.

“It’s been a bit more turbulent than I’d like, but we have made progress,” says Cornell about the integration. He notes that the firm averaged a 20 percent increase in U.S. revenue from its top 20 clients in its last fiscal year. Cornell declined to name clients, but they include Citigroup Inc., Morgan Stanley, and Merrill Lynch & Co., Inc. Cornell also points to the firm’s rise in some of Thomson Financial Capital Markets “league tables,” which track deals handled by a firm. In M&A, it ranks fifth in the U.S., with deals valued at $88 billion. Still, Cornell says he’d like to see the firm pick up the pace in the U.S., especially in M&A and tax. (The firm declined to break out U.S. revenue numbers.)

But the firm still needs to resolve compensation issues. In addition to reviews, it has formed a committee to address pay-again. Cornell says he believes the New York partners support lockstep: “I think just about all of them accept it now.” But in New York John Carroll, managing partner of the Americas, says the firm must be more flexible. “We have to evolve to a place where our basic lockstep system is more sensitive to the competition.”

Bon voyage.

E-mail: sbeck@amlaw.com.