Allen & Overy's (A&O) average PEP leapt by 20 per cent, from £656,000 to £788,000, during the last financial year, according to the firm's second set of limited-liability partnership (LLP) accounts. Turnover also increased, by 11 per cent, from £666m to £736m.

But although A&O's financial performance for 2005-06 was largely in line with the firm's magic circle rivals', both its PEP and turnover are lagging behind its peers'. It is worth pointing out that A&O is also the sole magic circle member to publish its accounts, prepared in accordance with UK GAAP. In an unprecedented (for A&O) conference call on 6 July to discuss his firm's figures, senior partner Guy Beringer called the move to LLP status "an opportunity, not a burden", adding that the process had encouraged transparency and a more professional and businesslike approach. What it also means is that the precise degree to which A&O's results can be compared on an equal footing with the rest of the magic circle is unclear. However, on the figures available the firm appears to be the least profitable of the magic circle and, as The Lawyer revealed last month (7 August), it has lost ground on its key rivals since the turn of the century.

Critics of the firm say part of the reason for this is its remuneration system. A&O has one of the longest locksteps in the City, running for 15 years. Equity partners start at 20 points, rising by two points every year to a maximum of 50 points. During the last financial year one point was worth £24,009 (up from £20,085), meaning partners at the top and bottom of equity pocketed £480,000 and £1.2m respectively.

As first reported by The Lawyer (15 May 2006), A&O awarded star finance partners Tim Polglase and Robin Harvey extra points on its lockstep following the spring departure of Stephen Gillespie to Chicago-based Kirkland & Ellis's London office. The move followed the firm's decision to slash the number of equity points awarded to its London-based project finance partners. A&O justified the controversial move by arguing that it was in response to increasing competition in the global projects arena and the weak dollar. The new points took effect on 1 May 2006.

A&O has a significantly weaker corporate offering than its peers', in particular Linklaters' and Freshfields Bruckhaus Deringer's. Yet, thanks to the year's buoyant M&A and capital markets, A&O's corporate practice recovered somewhat from the difficulties it experienced in the previous financial year. Global revenue jumped by 13 per cent, from £260m to £294m, while profit shot up by 28 per cent.

The firm has 342 equity and 82 fixed-share partners. The average remuneration for those partners increased from £259,000 to £270,000. According to the LLP accounts, the profit to be allocated to fixed-share partners was £22.18m. Fixed-share partners receive a salary and one profit point. They are typically promoted into the equity after two to three years as fixed-share partners.

Total costs increased by 6 per cent. This figure included the staff bonus pool, which increased by a healthy 33 per cent from the last year. This allowed A&O to pay each employee a bonus equal to eight weeks' salary.

A&O had no bank debt at the time of going to press, but had secured a £75m bank facility to help cover the cost of its new offices at Bishops Square. The loan was put in place last year to augment the current £65.8m cash surplus that A&O has built up via retained profit for the move, which is planned for October 2006. It is thought that the amount borrowed will be around £40m.

The LLP accounts also showed that the firm has created a minimum capital layer for the first time, following the introduction of a new accounting adjustment (FRS 25). Partners' capital is currently classified as equity, with the minimum capital layer being £35m. The firm has reclassified the remainder of its partners' capital (£74.5m) as a liability, putting total partners' capital at the firm at £109.5m

This financial prudence is also in evidence in A&O's client base, with no individual client accounting for more than 5 per cent of the firm's total income.

According to the accounts, A&O has slashed its staff pension fund deficit from £26.2m to £22m. The firm's partners have been contributing to a fund each year since 2002 to deal with the multimillion-pound hole, paying £2.4m last year. The firm has put a plan in place to pay the deficit off in 10 years. A&O closed its final salary scheme to new members in 1998, replacing it with its current money purchase pension scheme.

Internationally, A&O's investment in Germany began to pay off last year with the firm making what Beringer called "good progress" and posting a solid set of figures. China continues to be a major focus, with a growing presence in Beijing and Shanghai and a mature strength in Hong Kong. And the US, a problem for all four of the magic circle, saw its PEP rise by 135 per cent. Firmwide, A&O made up 33 partners on 1 May 2006.

Strategically A&O has set its stall out publicly and privately for a merger. Realistically, though, it is unlikely to happen in the short term whatever management might say over lunch, but watch this space.