HSF partners vote for modified lockstep in remuneration overhaul

Legacy Herbert Smith partners will abandon the firms rigid eight-year lockstep in favour of a merit-based pay system following the October 2012 merger with legacy Freehills, the firm said this morning.

Partners have given the go-ahead to an aligned remuneration system by opting for a hybrid model of the two previous systems run by Freehills and Herbert Smith, creating a modified lockstep for Herbert Smith Freehills (HSF). 

The new system will kick in from the start of the 2014/15 financial year, with partners’ performance to be assessed using a global balanced scorecard marked across 12 different areas, from new business to people management.  There will also be an annual bonus pool used to reward exceptional performance. 

However Australia partners will have a specific performance related component above a certain point in the lockstep, one which is slightly lower down the lockstep to legacy Herbert Smith. “This reflects the nature of partner remuneration systems in the Australian market,” a spokesperson said.

The partnership vote, which is understood to have ran over a number of days last week, required a 75 per cent majority vote from each of the legacy partnerships. It was conducted via secret ballot electronically. 

The process has been partner-led, with the firm nominating a remuneration and nomination committee to oversee the aligned system. 

London’s CEO David Willis told The Lawyer that the decision has been made within the firm’s timetable. He added the move would not impact associate or trainee pay, which has its own remuneration structure from office to office.

Although a number of draft proposals for the overhauled system have been put forward in recent months, the firm confirmed that this was the “first and only” formal partnership vote on the issue.

Top performing partners at legacy Freehills took home AUS$1.8m (£1.02m) in 2011/12 before bonuses. Before the new system was announced, sources said partners at legacy Freehills were reluctant to wed with legacy Herbert Smith’s more rigid eight-year lockstep, concerned that a compromise between the two systems would lead to pay cuts for its top performers.

A large chunk of financial-related issues were discussed during HSF’s original £800m merger agreement. This included a cash call of £20m to all equity partners at legacy Herbert Smith, in an effort to boost its capital structure as part of the planned financial integration with Freehills (13 May 2013).

The combined firm also overhauled its financial team with the introduction of two new roles, global chief financial officer and financial director for UK, EMEA and Asia. 

Legacy Herbert Smith’s eight-year lockstep ladder currently runs from 43 to 100, meaning that those at the top of equity – thought to be around 65 partners – took home £931,000 in 2011/12.

The London disputes team had a strong year in 2011/12, contributing £141.7m to the City office’s turnover of £312.3m. In comparison, corporate generated £104m, finance £31.3m and property £35.4m. PEP for the year fell to £840,000, compared to the £1.04m dished out to equity partners in 2008.

Read more in last week’s Number Crunching: Herbert Smith Freehills – remuneration deliberation