The pull of PEP - DLA Piper's partnership shake-up raises interesting questions
Why would you want to triple your equity partnership, as DLA Piper is now on course to do for its non-US business? After all, it flies in the face of a 20-year trend that has seen commercial law firms make up armies of non-equity partners to drive up their profits.
October 26, 2011 at 07:03 PM
3 minute read
Why would you want to triple your equity partnership, as DLA Piper is now on course to do for its non-US business? After all, it flies in the face of a 20-year trend that has seen commercial law firms make up armies of non-equity partners to drive up their profits.
But if you step back a little and reconsider lockstep (or the supposedly 'merit-driven' models that look suspiciously lockstep-like on closer inspection) then the calculation totally changes. With a remuneration model that allows you to pay your top people widely varying amounts, then the question becomes: why would you want to keep massed ranks of non-equity partners?
Highly leveraged law firms work well in rising markets because the interests of fixed-share and equity partners are strongly aligned. But move into a hard-growth market and you are left with high fixed costs, volatile profits and tensions between equity partners – whose pay may go down in tough years – and salaried partners. A high proportion of equity partners also acts like a cushion in hard times, as it makes your costs more flexible.
Add in that high leverage can often lead to a greater reliance on debt, which gets more expensive during downturns, and the reasons to lower your leverage or have more of your partners within the equity are pretty compelling (so much so that you could argue that widespread expansion of non-equity partners is a distortion thrown up by the restrictions of lockstep).
True, leverage in the top 50 has continued to creep up since the banking crisis of 2008, with the group this year averaging 5.6 fee earners for each equity partner, against 5.4 in 2007-08. But if you look at many larger firms – including the magic circle – leverage has generally fallen. All things being equal, a large law firm with rising leverage over the last three years is a sign that something's going wrong.
These considerations have been weighing on DLA Piper's mind. As one of the most expansive firms through the 1990s and 2000s, leverage once worked great. But these days, a serious international practice with nearly 10 fee earners for every equity partner is most definitely pushing its luck. (I suspect, in this case, defusing inter-partner tensions and spreading the firm's capital base are DLA Piper's primary motivations.)
Yet there are two causes for concern for any firm expanding its equity ranks. A low leverage model with highly flexible partner pay means a firm must closely manage performance, otherwise such systems can become a licence to fudge quality control.
Even more thorny is the issue of profits per equity partner (PEP), which remains the share price for major firms. There's always been some truth to the criticism that the benchmark encourages law firms to structure their businesses to look good on that particular measure, rather than on the basis of what works for the underlying business.
With DLA Piper's PEP set to fall under this proposed shake-up, it will face that awkward reality head on.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllMcDermott Hits Paul Hastings In London Again As Macfarlanes Also Swoops For Talent
2 minute readRe-Examining Values: Greenberg Traurig's Executive Chairman on the Lessons of the Pandemic
4 minute readDiversity Commitments Feel Hollow When Firms Cosy Up to Oppressive Regimes
Trending Stories
Who Got The Work
Michael G. Bongiorno, Andrew Scott Dulberg and Elizabeth E. Driscoll from Wilmer Cutler Pickering Hale and Dorr have stepped in to represent Symbotic Inc., an A.I.-enabled technology platform that focuses on increasing supply chain efficiency, and other defendants in a pending shareholder derivative lawsuit. The case, filed Oct. 2 in Massachusetts District Court by the Brown Law Firm on behalf of Stephen Austen, accuses certain officers and directors of misleading investors in regard to Symbotic's potential for margin growth by failing to disclose that the company was not equipped to timely deploy its systems or manage expenses through project delays. The case, assigned to U.S. District Judge Nathaniel M. Gorton, is 1:24-cv-12522, Austen v. Cohen et al.
Who Got The Work
Edmund Polubinski and Marie Killmond of Davis Polk & Wardwell have entered appearances for data platform software development company MongoDB and other defendants in a pending shareholder derivative lawsuit. The action, filed Oct. 7 in New York Southern District Court by the Brown Law Firm, accuses the company's directors and/or officers of falsely expressing confidence in the company’s restructuring of its sales incentive plan and downplaying the severity of decreases in its upfront commitments. The case is 1:24-cv-07594, Roy v. Ittycheria et al.
Who Got The Work
Amy O. Bruchs and Kurt F. Ellison of Michael Best & Friedrich have entered appearances for Epic Systems Corp. in a pending employment discrimination lawsuit. The suit was filed Sept. 7 in Wisconsin Western District Court by Levine Eisberner LLC and Siri & Glimstad on behalf of a project manager who claims that he was wrongfully terminated after applying for a religious exemption to the defendant's COVID-19 vaccine mandate. The case, assigned to U.S. Magistrate Judge Anita Marie Boor, is 3:24-cv-00630, Secker, Nathan v. Epic Systems Corporation.
Who Got The Work
David X. Sullivan, Thomas J. Finn and Gregory A. Hall from McCarter & English have entered appearances for Sunrun Installation Services in a pending civil rights lawsuit. The complaint was filed Sept. 4 in Connecticut District Court by attorney Robert M. Berke on behalf of former employee George Edward Steins, who was arrested and charged with employing an unregistered home improvement salesperson. The complaint alleges that had Sunrun informed the Connecticut Department of Consumer Protection that the plaintiff's employment had ended in 2017 and that he no longer held Sunrun's home improvement contractor license, he would not have been hit with charges, which were dismissed in May 2024. The case, assigned to U.S. District Judge Jeffrey A. Meyer, is 3:24-cv-01423, Steins v. Sunrun, Inc. et al.
Who Got The Work
Greenberg Traurig shareholder Joshua L. Raskin has entered an appearance for boohoo.com UK Ltd. in a pending patent infringement lawsuit. The suit, filed Sept. 3 in Texas Eastern District Court by Rozier Hardt McDonough on behalf of Alto Dynamics, asserts five patents related to an online shopping platform. The case, assigned to U.S. District Judge Rodney Gilstrap, is 2:24-cv-00719, Alto Dynamics, LLC v. boohoo.com UK Limited.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250