Epp V Pep
3 September 2007
It was a breakthrough year for the top firms in
the UK, with the global elite (Allen & Overy(A&O), Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters) each posting a PEP in excess of £1m in the same year for the first time.
But is that a true and accurate figure? The answer is ‘yes’, if you want an average remuneration per equity partner, but ‘no’ if it is average remuneration per partner you are after. In total, seven of the top 100 firms
posted PEPs in excess of £1m, but only three of these remain above that level when the remuneration of other partners is factored in.
Two years ago The Lawyer introduced a
new indicator to measure firms’ financial success: EPP. The idea was simple.
Everybody in the market knows that a bunch of firms has been going through hoops to make their PEP figures look good, with de-equitisations, managed exits and a plethora of partner-related titles.
The result? A firm might have a couple of hundred partners, but in reality only a handful were sharing fully in the profit(although, it should be pointed out, the risk aswell), which means that, although PEP at legions of firms across the country might be up by more than 10 per cent on last year, only a handful of partners at these firms are benefiting fully.
Does this matter? Certainly there has been a backlash recently against the use of PEP alone as a measure of a firm’s success. Most famously, A&O senior partner Guy Beringer wrote earlier this year that it was wrong to
focus on PEP, calling it “a dangerous and undesirable metric for the legal profession to follow”.
The real issue at stake here, however, is simple: retention. If a tiny group of partners is creaming off the profit earned by ranks of assistants and non-equity partners working all hours, then it increases the risk that some will not stick around for long. The Lawyer’s groundbreaking EPP figure blows away the smoke from this particular game.
A clearer comparator
Thanks to the online unveiling of this year’s results in TheLawyer.com’s ‘Top of the Peps’ blog, the market has been familiar with the headline PEP results for most of the summer. As mentioned above, for the first time the
magic circle firms all posted PEPs in excess of £1m in the same year. But how do they compare on EPP?
Of the four global firms, only Freshfields, which was all-equity until the end of the 2006-07 financial year, and Linklaters, which posted the highest PEP of the quartet
with £1.15m, remain above the £1m per partner figure. Slaughter and May, that perennial oddity, was the only other firm in the top 100 to post a PEP and EPP of more
A&O moves up from sixth in the PEP table to fourth on EPP, while Clifford Chance drops from seventh to eighth, just
above super-boutique Sacker & Partners,
itself a new entry into this year’s top 100 and one that posted a record PEP of £874,000 (Sackers’ EPP is a respectable £507,000).
Slaughters senior partner Tim Clark endorsed The Lawyer’s level playing field approach to profit, saying: “The profit per partner approach, equity or otherwise,that The Lawyer introduced is a better
comparator, since it shows the rate of profit by ownership and is less susceptible to distortion through the firm’s approach to its equity than the PEP comparator.”
Elsewhere, The Lawyer’s EPP figures offer further evidence of the financial engineering endemic in the UK legal market. Take DWF, Howard Kennedy and
Ward Hadaway, for example. Each of these
firms posted double-digit increases in PEP last year. DWF’s PEP was up by 12 per cent, from £332,000 to £373,000, while Ward Hadaway cracked the £400,000 PEP
figure for the first time. And Howard Kennedy? PEP soared last year, up by a third, with equity partners on average
The operative word here is ‘equity’. These are three of the firms with the widest disparity of any firm in the top 100 between the number of equity and non-equity partners.
Howard Kennedy’s strong PEP performance was aided by the fact that just 17 of the firm’s 75-member partnership are
full equity. The firm’s equity partners may have received on average £630,000, but the EPP was just £244,000.
Looking past the PEP
As Clifford Chance managing partner David Childs puts it:
“There is no single number that will adequately measure
the success of a firm. You also need to look at growth, the
quality of clients, a range of factors. “Financially we do look at PEP, but also the top of the lockstep. Lawyers working day after day, hour after hour want to know that what they’re earning is not way out of line compared with their peers at other firms.”
A&O managing partner David Morley agrees. “Financial metrics alone are only one indicator of success,”
he says. “Without losing focus on financial performance, tomorrow’s law firm will need to expand its view ofsuccess and redefine it in terms of sustainable positive impact on its clients, its people and society as a whole.”
And the trend for tight equity? “That model is unsustainable unless the firm’s genuinely offering a route through to equity,” says Childs. “If it’s not, then
partners will just leave.”
Over the past few years the firm that, fairly
or not, has been associated most closely with having a tight equity is DLA Piper. Last year the firm expanded its equity, yet equity partners still represent just 29 per cent of the total partnership.
The firm’s chief executive Nigel Knowles denies that the equity at his firm is a closed shop. “There is a genuine route. We promoted 13 partners into the equity this
year. We have a business model based on the fact that we’re a multijurisdictional firm. That business model works for us and we feel under no pressure whatsoever to change it,” he says.
Knowles’ point about the internationalisation of the legal market goes to the heart of the matter, at least for
firms with significant overseas operations. DLA Piper, for example, has a Georgian operation where fee rates are 40 per cent those of its London office. “If we compared
the PEP of that office to a top City firm, it would appear disastrous,” says Knowles. “But we have a fabulous business there.”
Moreover, DLA Piper’s PEP of £715,000 includes the equity partners in Georgia. If the firm gave a PEP just for London, it would be significantly higher.
Freshfields, of course, has had plenty to deal with this year close to home without the added complication of overseas partners. But the firm’s chief executive Ted Burke agrees with Knowles that the overseas growth of
firms makes the all-equity partnership model virtually redundant.
“For larger, internationally faced firms it’s very, very difficult because of the differences in pricing across various jurisdictions,” he says.
As ever, it is all in the detail. Incidentally, Howard Kennedy has no overseas offices.