Unfollowing the money

Gloomy headlines about magic circle law firm profits flatlining demand the application of a little perspective. After all, the average equity partner is now taking home £200,000-£400,000 more than s/he did before Covid hit. That’s an increase equivalent to five to 10 times the British worker’s mean salary. 

Deals have diminished, while overheads remain high on the back of staff pay rates that soared when the market was hot. As first-world problems go, however, the City’s failure to match the record surpluses posted as the epidemic ebbed is a classic of the genre.

Of more interest are indications that the comparators traditionally used to measure elite law firm performance are on the way out. Mishcon de Reya has decided it will no longer disclose profit per equity partner, describing the metric as ‘unhelpful’.

Freshfields Bruckhaus Deringer has gone further. From next year, disclosure will be limited to mandatory accounts filed months after the year end. One assumes the accounts will continue to disclose net profit before partner remuneration, but not the headline number on partner ‘take’ beloved of journalists.

‘We consider the real sign of the firm’s progress to be based on the quality of business we’ve built and the client mandates we’re winning around the globe,’ said managing partner Rick van Aerssen.

Freshfields did not respond when I asked the firm to elaborate. But I would venture that other leading City firms will follow suit here.

PEP is a crude shareholder value metric and its usefulness is certainly limited. Employees don’t share in the partner bounty (or not directly). And what of the stuff that really matters, like staff retention and morale, and client loyalty and satisfaction?

These are noble quality measures, to be sure. But I remain sceptical. Businesses exist primarily to make money for their owners, or they’d be hobbies. And I’m not sure an equity partner told her drawings are being slashed 25% will take much solace in the number of pro bono hours her underlings put in.

If law firms are going to get ‘woke’ about this, there is another consideration. A PEP figure enables the calculation of wage ratios of top- to bottom earners, now a standard measure of fairness and transparency in big business. What could be more ‘progressive’ than that?