In addition, from a recruitment perspective, it can limit a company`s ability to pay a premium to recruit (or retain) sought-after lateral partners. There is always the fear of paying an incoming partner too aggressively. While it may be justified or necessary to “land” the partner in demand, there is a very constant fear of upsetting other partners who may not earn as much even if their finances are in a similar situation. This can lead to a whole series of problems on several levels. The Am Law 100 doesn`t fall with the same fanfare as the U.S. law school news rankings, which is a shame because there`s actually a lot more interesting data lurking in the law firms` annual rankings. Am Law 100`s “classic” figure, based on gross revenue, generated 52 law firms that generated more than $1 billion in revenue last year, but there are a few hidden goodies in the Companion Partner Profit ranking. Earnings per partner (PPP): Part of the annual AmLaw 100/200 ranking of U.S. lawyers and the most widely used measure of a law firm`s profitability. This is the number that companies and lateral partner candidates focus on the most.
According to the U.S. attorney, the PPP is calculated by “dividing the company`s net operating profit by the number of partners.” (U.S. Attorney, 2021) Explanation: Take the company`s sales from a period of one year. Subtract all overhead and operating costs (rent, salaries, etc.). What remains (before deduction of income taxes and interest) is the net operating income. Divide this number by the number of partners and you have the PPP. Despite its widespread visibility, critics say some companies are tempted to “play” the numbers they report. For non-shareholder partners, payment is usually made twice a month, with a possible bonus at the end. Wachtell, Lipton, Rosen & Katz remain at the top of the list with a profit of $8.4 million per partner. For the entire Am 100 law, the average PEP increased by 19% in 2021. Non-equity partners (or “income”): Associates who have a say in issues and limited voting rights, but who do not participate in the Company`s profits.
In the U.S. Attorney`s AmLaw 100/200 survey, non-shareholder partners are defined as “those who receive more than half of their compensation on a fixed income basis.” (U.S. Attorney, 2021) In companies where profits have not grown as quickly, partners are more tempted than ever to take a step and earn record compensation elsewhere. Gross income: Fees that a law firm generates solely through legal work (does not include payments or refunds or non-legal ancillary activities) (American Lawyer 2021). A law firm may have high gross revenues but still have lower profitability, which is why the U.S. attorney has different rankings (e.g., gross revenue rankings, profit rankings by partner). Lockstep compensation has always been the norm for Magic Circle/UK and some Wall Street companies. However, Magic Circle and Wall Street firms that have embraced the lock-in compensation model in the past are changing their compensation models to compete more effectively with partners with very large practices and to keep partners with very large practices (who might be likely to be attracted to companies that would pay much more for the same size of practice). A law firm on the list of the super rich stands out.
Wachtell, Lipton, Rosen & Katz made a profit of $8.4 million per partner, $3.86 million in revenue per attorney and a profit of $2.66 million per attorney last year, according to American Lawyer articles here and here. And finally, everyone`s favorite ranking: the top 10 companies by profit per equity partner. You can access the full list here. Companies tend to minimize the duration of warranties to protect themselves from partners who are not doing as well as expected. The standard is usually the remainder of the current fiscal year and the next full fiscal year. Longer than that is the exception. Formula compensation model: This is a subset of the “eat what you kill” model. Some companies will pay their partners on a formula basis. In short, if you generate X or invoice Y, you get __% of the numbers. The advantage for some: it is predictable and objective, does not take into account factors such as politics in the mix, and as one partner happily explained, “My compensation can often be determined in 10 minutes in an Excel spreadsheet”.
It was a vocabulary and discussion that existed in conversations with partners over the past two decades, but it was much more unique,” Walden said of early retirement or wealth creation. Now it is increasingly becoming an integral part of the vocabulary of a large legal partner. “While gross revenue is a term often used to assess which companies are at the top of AmLaw (from a general perspective), AmLaw has different types of rankings (for example, which companies have the highest gross revenues that have the highest profits per partner). Just because a company is at the top of AmLaw for gross revenue doesn`t mean partner compensation is at the top of the market. There is no correlation between gross income and profit per partner. The public discourse on all this would sound a bit like a fan dance, with some law firms timidly confirming some numbers when it suited their tactical need to flash a little leg. Well, one might naively ask, why would partners, executives and chief operating officers of law firms disclose confidential information? In self-defence. Without public benchmarks or transparency, business-to-business financial data would be in the hands of qualified recruiters and legal consultants who, after several decades of practice, would have built sophisticated databases on company revenues and salaries.
It`s a bit of an exaggeration to imagine an age when they would use this sotto voce data to gather potential recruits or, in a harmful way, shake up the market. Inevitably, an information market would have developed in which journalists, consultants, recruiters and bankers would exchange information on the finances of approximately ISIC 180. It is a very delicate balance between maintaining the cultural cement that has made the company a special place for many years and competitiveness in the fight for the talent of lateral partners (and retention). Would the large legal market really be different if it were free from the tyrannical picture of profits by partner? Guarantee: For incoming lateral entrants, the amount of compensation guaranteed for a certain period of time. At the end of the warranty period, the compensation will be reset if the partner falls under the company`s existing compensation formula. If you are not equity, your level will be set at a guaranteed level. If you are in equity, you will enter the appropriate level of equity. Partnership: In general, there are two levels of partners: (1) stock partners and (2) partners without equity (or “income”). For companies structured as corporations, they may use the terms “member” or “shareholder” or “director”, but I will use the terms partners more widely used in this article. As planned by Aric, a well-written piece. In the litany of what and how the information would have been revealed in the hypothetical world without the American lawyer, the comment forgets what happened even before the coverage of 100 PPPs before AmLaw 100.
Already during my law studies (in the late 1970s), the public starting salaries of new employees already differed between law firms, and law students and lawyers used them as an indirect indicator of the differentiation of remuneration at the higher levels of lawyers. And even in the 1980s, there was a lateral movement, even on the part of the partners, and the fact that it was mainly a “descent” from a larger firm to a smaller firm, information on the remuneration of partners was collected by the lateral moving partner of the reference research firms and through interviews with law firms. Even without the American lawyer, we all knew which law firms were making a lot more money and which weren`t, and a pretty good estimate of how much more or less. Lateral recruitment and lateral movements are now one of the most comprehensive and accurate sources of information on the remuneration of other law firms. More than just a PPP is available from a lateral partner recruit, including the range of compensation between partners and attributes that correlate with different compensation levels. This information is much more useful than the average PPPs of the AmLaw 100. Aric is therefore right to say that he is simply misguided to accuse the release of AmLaw 100 PPP. The information was and will be known, whether published or not. Closed compensation system: Compensation data is confidential and is usually determined by the compensation committee. While transparency is reduced, this gives a company more flexibility to reward top performers without having to expand compensation decisions within the partnership. Some companies have a “ask first” compensation system where compensation is not automatically shared with the partnership, but when a partner asks to “see the books”, they have access to compensation information for all partners.