Lovells is secretly planning to abandon its lockstep in a bid to seal the proposed merger with Washington DC firm Hogan & Hartson.
The firms are gearing up to promote the merger to their partnerships later this year and it is understood that Lovells’ management will stress the fact that Hogan operates a purely merit-based system as a selling point of the deal.
The top 10 firm has long lagged behind its City counterparts in profitability, and with an average profit per equity partner (PEP) figure of £586,000 for 2008-09, remuneration of star performers is an issue.
Lovells has modified its lockstep in recent years so that partners do not gain a rung each year automatically. This allows management to freeze or reverse the positions of underperforming partners, although to date no provision has been made to reward exceptional performers.
A source at Lovells said the fact that the firm has already moved away from the traditional lockstep model will make it easier to integrate its remuneration system with Hogan’s.
“Because of the movements we’ve had on our lockstep it will be easier,” the source said. “This is an argument that will be used in favour of the merger.”
Although the firms are not totally aligned on profit (for the 2008 financial year Hogan’s figure stood at $1.17m (£730,000)), on revenue their financial results suggest a merger of equals. In 2008 Hogan turned over $922.5m, while Lovells’ figure was £531m.
Insiders at the firm suggested that talks had not advanced to the point of identifying where the combined entity, which is likely to be called Hogan Lovells, would be headquartered.
However, management on both sides are understood to favour full financial integration, although the exact details of how this would work in practice are still being thrashed out.
A source said: “The concept is that we will make it as much a single firm as is possible under regulations.”
Hogan’s merger negotiation team, which is made up of chairman Warren Gorrell and finance managing partner Prentiss Feagles, will attend Lovells’ annual partner conference in Lisbon at the end of November.
The Lovells merger negotiation team, which consists of managing partner David Harris, senior partner John Young and litigation chief Patrick Sherrington, will then attend a meeting of Hogan’s partners.
If both partnerships back the merger it is understood that the firms plan to complete the deal before the end of Lovells’ financial year in April 2010.
Lovells and Hogan declined to comment.