Shardul Amarchand Mangaldas (SAM) has announced a reduction in the variable bonus component of take-home pay of fee-earners if the firm - if the firm as a whole does not perform to target - by effectively deferring a greater percentage of the variable payments to the following financial year, according to firm insiders.

Nevertheless, high performers might actually see normal bonus payments under the new model, we understand, since the bonus payments are still linked to individual performance.

This means that equity partners have agreed to sacrifice profits they can draw to practically guarantee - at least for now - that fee-earners’ fixed components would be unaffected.

The SAM remuneration model is slightly complex, however.

In short, fresher recruits at SAM receive 100% of their remuneration as a fixed component, as we had reported in 2016 and 2017, so they would be completely unaffected by the move.

For more senior a fee-earners, a larger percentage of their take-home pay is made up by a variable portion, which ordinarily makes up 50% of the total remuneration.

Of that variable bonus element, in ordinary non-Covid times, SAM would normally pay out around 80% in the current financial year (for example, for the 2019-20 financial year, this would work out to 30% in October 2019 and 50% in March 2020). The remaining 20% would be paid out in the following financial year, as a retention strategy (in the case of the previous 2019-20 financial year, this remainder would be paid out in May 2020).

Payments due for the previous 2019-20 financial year will not be altered, we understand.

But, under the new measures, if the firm does not hit its ordinary financial targets (as seems likely in the current climes), a greater percentage of the variable component will be held back until the next financial year.

In particular, instead of 80%, only 50% of the variable bonus will be payable in March 2021 for this financial year, with 50% thereafter.

Furthermore, the total variable bonus amount will be dependent both on whether the firm has achieved its overall financial targets and whether an individual fee-earner has hit their targets.

SAM variable payments are currently strictly based on a fee-earners billings, without any discretion.

Update-2, 18:53: Updated with more details of SAM's variable payments structure.

While this would lessen the cash flow crunch on the firm, by keeping the fixed component the same, it would also reduce profits of the firm and therefore the take-home pay of the equity partners.

Update-1, 17:25: SAM has officially confirmed the tweak in its remuneration structure in a statement:

As we navigate these challenging times, our focus remains on the wellbeing of our people, securing the business of the Firm, strong financial management and providing as much certainty as we can to our stakeholders.

The Management Board of the Firm has had extensive deliberations and have taken the following decisions for FY 20-21 for our lawyers:

• As matters stand, there will be no cut in fixed monthly retainer and the fixed retainer would be same as that of last year; and
• In addition, where lawyers are eligible to variable compensation, it shall be calculated taking into account the performance of the Firm and be paid in equal tranches, in March 2021 and the first half of FY 2021-22.

Also, the balance of the past FY’s variable compensation shall be paid out by the Firm, as always.

Any adverse impact of the Firm’s performance would be largely borne and absorbed by the equity partnership of the Firm.

Although we are aware of the tough and unprecedented time the Firm, the country and the world are going through, we have borne the interests of all in mind as we brace ourselves for a challenging time ahead, with prudence and vigilance. We are confident that we will emerge from these times as a stronger and more evolved firm.

As always, we remain committed to serving our clients and are proud that the Firm has had a great start to this Financial Year with headline deals, even in the present climate.

Khaitan & Co has followed a model where senior equity partners agreed to a flat 20% haircut, without any present reduction at the lower fee-earner and staffing levels.

However, SAM’s move falls short of CAM’s more aggressive cuts, where equity partners would not draw any pay this financial year and more junior fee-earners earning more than Rs 25 lakh per year, would be subject to escalating deferment of salaries from 10 to 30%.

We have reached out to SAM for comment.