It’s EPP talk, not PEP talk

With back-of-the-envelope projections already being made for the end of the financial year, it’s a good time to address that collective fiction profit per equity partner (PEP).

PEP, originally simply a measure, has become an agent of organisational behaviour. Lawyers know it, journalists know it and headhunters know it. And by the way, you can blame the media all you like, but it’s not us who’ve manipulated equity partner numbers to make figures look better on paper. That said, we ­colluded in the excitement of the million-pound PEP stories – particularly at the height of the boom; although any legal journalist will tell you they got deeply tedious to write after a while.

As we explore on page 18, contesting the primacy of PEP means exploring the wider question. In using PEP as the industry norm there’s an ­assumption that a partner is only a partner when they share fully in the equity, even though fixed-share partners enjoy similar voting rights and are usually exactly the same members of the LLP.

The PEP measure was imported from the US in the 1990s, when UK firms operated largely equity partnerships, but there are only six of those left in the top 100 (seven, when DLA Piper joins them). However, over the past two decades we’ve seen a Balkanisation of financial measurements, while Vereins and ABSs problematise PEP even more.

Of equal use are revenue per lawyer and, in profit analysis, earnings per partner (EPP) – defined as average compensation across all classes of partner and closer to the LLP approach. EPP is simply a more realistic reflection of pay levels; on that basis, only 13 firms averaged more than half a million in 2010-11, as opposed to 26 on PEP.
PEP still has significance as a virility tool among global firms, and the joint earning power of any equity partnership is always of interest. We’ll still be monitoring the make-up of the equity layer, ­particularly on a gender basis.

But from now on The Lawyer will no longer take PEP as the principal benchmark. PEP can tell you a lot of things about a firm, notably its power ­distribution and culture. But in terms of all-round business performance, EPP will be our primary indicator. Less butch, perhaps, but more accurate.;