Global Firms in Focus is a weekly column about international law firm business by chief global correspondent Chris Johnson. 

In the last installment of this column, I argued that Big Law profitability is massively overstated and that some firms generate virtually no true profit at all.

The full detail is available here, but it essentially boils down to the way that the industry treats all equity partner compensation as profit.

In reality, what The American Lawyer's Am Law 100 and Global 100 surveys refer to as “net income” is actually a combination of two things: Equity partners' salaries as senior lawyers and managers, and their profit as owners of the business.

Treating net income simply as profit means that, from an accounting perspective, equity partners receive no above-the-line salary and therefore represent no cost to the business. The result is artificially inflated profit margins that dwarf those at some of the most profitable companies on earth. The average profit margin across the Global 100 is 39 percent and goes all the way up to Quinn Emanuel Urquhart & Sullivan, at a staggering 68 percent.

The piece was intended as more of a thought experiment, rather than seeking to provide yet another metric to assess law firm financial performance. That said, I did refer to a series of specific notional equity partner salary bands, which had been proposed by Alan Hodgart, a law firm consultant. By assigning firms with notional equity partner salaries and deducting this cost from net income, you are left with “true” profit.

Hodgart suggested setting average equity partner salaries at a 25 to 30 percent premium to each firm's highest-paid salaried fee-earner, or matching the compensation packages offered to general counsel at that firm's core clients. That equated to around $1 million for an elite firm; $650,000 for a midmarket firm; and $400,000 for firms focused on lower-margin, commoditized work.

(Applying these figures to our latest survey data led to some pretty wild results: Assigning a salary cost of $1 million per equity partner causes Jones Day's profit margin to crash from 49 percent to just 2 percent, while a $650,000 notional equity partner salary sees Norton Rose Fulbright's profits wiped out entirely, with its margin plummeting from 31 percent to 0.003 percent. Impressively, Quinn Emanuel and Wachtell, Lipton, Rosen & Katz's profit margins both remain above 50 percent, even after such deductions.)

Among the many emails I received from readers about the article were several questioning the levels at which these bands had been set.

Some suggested that the salary portion of equity partner compensation should merely be equivalent to that of a firm's most senior associates. I somehow doubt that equity partners would be happy with that arrangement. Others suggested mirroring nonequity partner compensation. That's better, but would again underestimate the true cost. Equity partners should have more responsibility or generate more business than their nonequity peers—that's why they were given equity in the first place—and would therefore reasonably expect to be paid more. (This also wouldn't work for all-equity partnerships, such as Cleary, Davis Polk, Jones Day, Paul, Weiss, Rifkind, Wharton & Garrison, Ropes & Gray, Simpson Thacher & Bartlett, Skadden, Arps, Slate, Meagher & Flom and Sullivan & Cromwell, to name but a few.)

Madhav Srinivasan, the chief financial officer at Hunton & Williams, wrote in with a particularly thoughtful and nuanced metric that adds a premium to average nonequity partner compensation based on the ratio of each firm's equity partner profits and nonequity salaries. Using his methodology, the average profit margin for the Am Law 200, excluding firms with all-equity partnerships, drops from 37 percent to 13.8 percent. That's about halfway between the margins of professional services firms Accenture (9.9 percent) and Exponent Inc. (16.7 percent), which feels about right.

There will no doubt be readers who disagree. I would therefore like to propose an alternative approach to deciding what is an appropriate notional equity partner salary cost for each firm: You decide.

At the foot of this story is an interactive chart with financial data for the world's 100-largest law firms by revenue. If you're an equity partner at one of these firms, ask yourself what you would expect to receive as a salary if you didn't hold an ownership stake in the business. If you type that figure into the notional salary box at the top of the chart, you can then see what your firm's profit margin would be if all of its equity partners were paid at that rate. You can even see the impact on margins at rival firms. Not that law firm partners would be at all interested in that sort of thing, of course …