Global Firms in Focus is a weekly column about international law firm business by chief global correspondent Chris Johnson. Reach him at email@example.com. On Twitter: @chris_t_johnson.
The topic of lockstep compensation is perhaps unique within Big Law. It somehow manages to be simultaneously divisive, critically important, and—for those not writing the checks or cashing them—numbingly boring. I sympathize. But bear with me.
The elite U.K. law firms have spent years trying to inject some much-needed flexibility into what is an inherently inflexible remuneration system, with varying degrees of success. They have tried bonuses, differential locksteps for international offices, and so-called super-point packages, which are used to reward star performers. Perhaps most effectively, managers typically now have the ability to alter an individual’s equity share—by holding a partner at a certain level on the “ladder” for more than one year, accelerating their progression, or even reducing their points, if necessary.
Yet the tinkering continues, with Clifford Chance partners voting earlier this month to approve yet another round of reforms designed to better attract and retain top performers. The firm’s lockstep will be stretched, while the method for calculating and allocating profit units will be altered so that big billers can receive a larger slice of the pie. Each partner’s profit share will also be reassessed as part of a comprehensive overview.The moves by Clifford Chance and other firms raise the question: Could too much lockstep reform turn out to be counterproductive?
It’s fair to say that the Magic Circle are never going to generate Wall Street levels of profitability. But they are actually more competitive than you might think. Freshfields Bruckhaus Deringer’s average profit per lawyer, for example, is almost identical to Dechert’s—and ahead of the likes of Shearman & Sterling, Sidley Austin and Weil, Gotshal & Manges. The U.K. firms do generally have lower average profit per equity partner than their U.S. peers, but this is partly because they are more generous with their equity.
Nevertheless, thanks to the constraints of lockstep, they are undoubtedly left at a competitive disadvantage.
One of the major problems with lockstep, which in its purest form sees partners remunerated based on seniority, is that it essentially under- or over-pays everyone. Profit pools are a zero-sum game, after all. But that has always been the case, so why the recent determination to change things?
Simple: U.S. law firms.
The Magic Circle used to call the shots and have their own way in London—and in most other markets in which they operated, other than the United States, of course. They had the best clients, the best work and were able to pay more than anyone else, which never hurts when it comes to recruitment.
The mass influx of firms from across the Atlantic has changed all that. Even the most profitable U.K. firms aren’t able to match the bumper packages on offer at some American rivals—particularly once you factor in the significant weakening of the British pound against the U.S. dollar over the past two years.The simplest solution would be to ditch lockstep entirely. But that’s not going to happen—at least not in the foreseeable future. Lockstep is such a deeply ingrained part of the Magic Circle ethos that dropping it would be almost inconceivable. As Allen & Overy’s senior partner Wim Dejonghe said: “It’s clear that lockstep has its limits, but it’s also clear that it is at the heart of our success.”
All that’s left is to rework what they’ve got in an attempt to make a round peg fit a multifaceted hole. The result, somewhat inevitably, is an imperfect compromise.
The consensus among a range of consultants and headhunters is that the various changes made by the firms have not gone far enough. The modifications certainly don’t seem to have done much to stem the loss of talent to American competitors, although the extent of this movement is often overstated. (It’s more of a steady drip than a flood, and is driven in part by the fact that U.S. firms are still expanding in London, whereas their U.K. counterparts are not.) Still, seeing even a handful of top partners walk out the door each year to join rival firms must be getting pretty old by now.
The truth, however, is that the Magic Circle are in an almost impossible position. If they don’t modify their locksteps aggressively enough, they won’t be able to reward their top billers in a competitive manner, and some are likely to leave. But if they are too aggressive and stray too far from the lockstep path, they risk losing the cultural differentiation that they have worked so hard to protect, at which point star partners may as well take the money and join a more merit-based U.S. firm.
“That is the challenge: the balancing act between maintaining your culture but being able to offer attractive compensation packages,” Dejonghe said. “You can’t push it too far.”
Finding that sweet spot will take strong management and a willing partnership. And probably a degree of trial and error. I suspect the Magic Circle aren’t done tinkering just yet.
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