The past year has been one of change for the UK's most obviously troubled firm. Faced with potentially crippling financial problems, Hammonds has examined its cost base, reduced its partner and staff numbers and overhauled its remuneration policy.

The initial cost-cutting exercise helped Hammonds to its best profit results since 2003. Across its 16 international offices average PEP came in at £328,000, a margin of 24 per cent. The UK performed less well, with the 20 per cent margin equating to a PEP figure of £294,000. However, each equity partner still has a hefty £260,000 invested in the business.

Bottom of equity at £176,000 is above the £130,000 average salary for a fixed-share partner. Italian managing partner Ricardo Rossotto remains at the top of equity, commanding £760,000.

During the past year Hammonds was still operating its modified lockstep, which runs from 16 to 26 points, with gateways at 20 and 23 points for partner reviews. However, at the start of the 2007-08 financial year it is introducing a merit-based lockstep that will better reward partner performance. Seniority will continue to play a small part.

Hammonds has dwindled in size. The firm's net people loss last year was 64, which all came in the UK, with London shedding 24 and the rest of Hammonds' offices losing 40. There are 31 fewer partners now than a year ago, but thanks to a 14-month lock-in Hammonds' equity remained unchanged at year-end.

Hammonds failed to reach its lockup target of 94 days, achieving 111 days on the basis of a 365-day year. Although the firm has succeeded in cutting its net borrowings by 38 per cent, its gearing at year-end was still high with a 36 per cent ratio.

Much of the credit for Hammonds' improved performance goes to managing partner Peter Crossley and finance director Laurence Campbell, but the hard work is not over. The firm still lags behind on profitability and its 4 per cent turnover rise was miniscule in a year of impressive growth elsewhere.