Thought leader

By Chris Bull, Osborne Clarke

PEP talk

A really good indicator of business performance should be easy to understand and universally applicable. It should also be relevant across a range of organisational models and genuinely reflect the underlying fundamentals. Particularly because it has been able to cope with the evolution of different partnership models (pure lockstep, modified lockstep, merit-based), profit per equity partner (PEP) as a metric for law firms appears to tick all the boxes. As highly public reporting and analysis of law-firm financial results has become unavoidable, PEP emerged, unchallenged, as the method for gauging the relative performance of firms.

There are some problems with PEP, however, which are increasingly being raised. The pages of FD Legal seem like the right place to give these arguments some sustenance. The problem with PEP is not to do with the calculation of the average. Although there have been some examples of firms calculating mode or median figures, I’m not convinced that they are any more useful. There is an argument, as some firms push top-end partner remuneration aggressively, that we need richer information sorted into ranges to understand how firms compare. However, this will be both harder to collect and to instantly understand.

Our ability to utilise PEP to compare firms’ profit performances is being undermined by a more fundamental trend in the shape of partnerships. Structurally, it is harder to justify the relevance of basing any measure on equity partner numbers only. With the band of UK top-100 firms who have preserved a pure equity partnership dwindling to single figures the focus on equity partner-remuneration figures begs the question – just what sort of ‘partners’ are those not in the equity ranks?

Plenty of the press comment on that question has expressed wariness about these burgeoning ranks. As the trend to ever greater numbers of non-equity partners (whether labelled fixed share, salaried, junior) has accelerated, those remaining pure equity partnerships are often lauded for sticking to their guns and sticking with ‘true’ partners. Certainly, PEP is losing its usefulness as some firms keep large proportions of their (least well remunerated) partners outside the calculation, with some suspicion that this is done to keep that all-important PEP number artificially high. It is widely accepted that equity partnership has become harder to achieve and, as we have seen through a series of ‘de-equitisation’ programmes, harder to keep.

But surely our actual experience of today’s UK firms is at odds with this perspective that equity partners remain the only partners that really count and that PEP remains the measure we should use and protect from manipulation? The bar has been raised not just for promotion to equity but for promotion through from associate to partner in the first place. One result of this, following the accounting profession’s lead, is the search for meaningful and attractive permanent roles (director, of counsel) below partner level.

Surely we are not all guilty of creating legions of ‘partners’ who don’t really deserve the title? My experience is of fixed-share partners or similar being required to perform fully as partners. While many or most have a fixed, guaranteed or salary element to their remuneration, it is common for them to have a profit share directly related to equity partner earnings, as at Osborne Clarke. Many structures are in reality single partnerships, with all partners sharing in the profits of the business. Promotion to equity is often merely the biggest of a series of gateways or hurdles embedded in the modern firm’s structure.

The solution, then, has to be that we accept that it is profit per partner and not PEP that reflects most accurately the true modern shape of legal partnerships. It also provides the only reliable way of measuring up how the pure equity firms are doing against the others. Most importantly, it might stop managing partners from feeling obliged to de-equitise still performing equity partners or dam the necessary flow of partners through to equity or accept the departure of ranks of fixed-share partners frustrated by their apparent second class – all in order to keep a single fictitious figure artificially high.