And now we come to the main event, the poisoned chalice bequeathed to us by Steven Brill. Let us proceed from the specific to the general, or if you prefer the structural to the symbolic.

Are the reported numbers accurate? Silly question. We all know the answer to this: Some firms report faithfully and conscientiously and some view reporting PPP to The American Lawyer as a marketing opportunity more than as an exercise in financial disclosure.

How do I know? Because I asked. Specifically, I posted a very short online survey on Adam Smith, Esq. last year around this time, inviting firms to respond to a few questions about their experience in participating in the annual AmLaw survey on PPP. In part this was prompted by a Bloomberg Law video interview with Kim Kleman, editor-in-chief of The American Lawyer, in which she came out strongly in favor of transparency immediately before I posted the survey.  Bloomberg had interviewed me on the same topic and I said then and renew today that I’d be delighted to be on a panel with Kim Kleman on this topic any time and anywhere. (Also see this Above the Law piece.)

As I said at the time, I couldn’t have put it better myself than Kim Kleman did:

“[The AmLaw rankings] are at the very core of what we do; it’s the only publicly accessible analytics of its kind. … Without rankings we’d go back to the days when it was all smoke and mirrors. …

Law is a business, a very important business, a huge business.  As journalists, we believe in transparency; these firms have incredible power and we believe they become better…when this kind of information is out there in the open.”

Big big caveat. #1: I assumed requiring respondents to identify themselves by name and/or firm would cut participation to zero. So all the responses are anonymous. #2. I published this poll on August 26, 2015 and although hundreds of people clicked through to look at it, the fact that no answers were required meant that respondents self-selected (which is true for most forms of research). This is not a random sample.

With that said, I think the results I did obtain are worth publishing now if for no other reason than that I know of no other reported attempt to actually assess firms’ compliance with the AmLaw survey. As an industry it sometimes strikes me that we’ve spent a couple of decades debating whether PPP is the greatest step towards transparency we’ve ever been the beneficiary of, or Lucifer’s work incarnate. But we’ve had this debate without anyone even asking firms about their degree of participation and compliance.

Enough throat-clearing. Here’s what people said.

The first question asked about response rates.  The graphic/pie chart follows, but to summarize, when asked “how fully does your firm respond?”

  • Totally: 33%
  • Mostly: 28%
  • Partially: 11%
  • Decline to participate: 15%
  • Not an AmLaw firm: 13%

AmLawPPPSlide1FullyRespond

The next question followed up on firms that didn’t participate, and asked for how long that had been the case.  The responses:

  • Just the last year or few years: 7%
  • 3-5 years: 15%
  • More than 5 years: 14%
  • More than a decade: 14%
  • Never: 50%

AmLawPPPSlide2HowLong

Finally, I asked respondents to characterize their confidence in the accuracy of the reported figures:

  • Highly confident: 2%
  • I think the vast majority of firms are fair and honest: 21%
  • For many firms it’s  more about marketing than finances: 49%
  • I find it difficult to give credence to much of what i see: 28%

AmLawPPPSlide3HowConfident

The survey invited open-ended comments, and again, while the respondents were self-selecting and those volunteering comments were presumably the most vocal by hypothesis, here are a few of their verbatim remarks:

  • It’s a joke and everyone knows it.
  • There’s no question there’s lots of gamesmanship going on.
  • I’ve worked at 3 AmLaw firms; all 3 massaged the numbers.
  • The nonequity partner tier creates hufe over-inflation of some firms’ PPP.

My hunch is that this surprises no one. This is not just sad, though it’s certainly that. It’s a sort of Gresham’s Law in action, at least if you afford Gresham’s Law (“bad money drives out good”) a commodious interpretation.

The Gresham’s Law dynamic is simply that where two forms of currency co-exist (classically, coins made of precious metal having intrinsic value), one debased through impurities or short-weighting and one of complete integrity, buyers will hoard the pure coins until all the currency remaining in circulation is debased. Importantly, this is true only if there’s a legal or practical obligation to accept both the pure and the debased at the same time and place and at face value.

Where there’s no such obligation—for example, among nations in fixing on a universally accepted global reserve currency—Gresham’s Law is inverted and good money (the US $) drives out bad (the Thai baht or the Brazilian real).

Thus with TAL’s reported PPP figures. When at least some other firms are assumed to be taking liberties to pump their numbers—it’s irrelevant which if any identifiable firm is provably in this category—scrupulous reporting can be seen as for chumps. But because there is no practical alternative (we have no choice but to accept all reported figures at face value, debased or pure), it’s understandable that suspicions arise.

This prompts a thought: Wouldn’t it be fascinating if another publication (the UK has a few covering Law Land…) were to start reporting PPP for the 200 AmLaw firms using transparent and rigorous standards. With no requirement to accept the debased currency pari passu with the pure one, would the numbers with integrity take a very high market share? Just a thought.


Let’s change the focus. Assume every PPP number reported were certified under Sarbanes Oxley standards by each AmLaw 200 firm’s Managing Partner and CFO and audited by one of the Big Four as to accuracy. What then could we say about the numbers?

First and most obviously, we’d note that they’re averages across all of each firm’s equity partner ranks (equity partners as defined by The American Lawyer, that is, namely those with at least 50% of their compensation reported on a K-1). Averages provide a handy and obvious place to start, but to really describe the distribution of partner compensation within a firm they’re nearly useless as a place to end.

Median and standard deviation would come to mind for any Statistics 101 student.

So would the simple ratio of highest to lowest, or the absolute amount of each figure.

So would identifying the figures for the 25th, 50th, and 75th percentiles of the partner population, or the 5-10-25-50-75-90-95th percentile bars while we’re at it.

You can surely suggest your own. The point is that it would be trivial to report these numbers and would not require The American Lawyer to lift a journalistic finger. Just ask the firms.

A second and by no means mutually exclusive change would be for TAL to identify, say with an *, firms for which the reported numbers are TAL estimates not provided by the firms; this too would require less than trivial effort. I have personally suggested this to TAL more than once, to no avail.

Third is the same question I’ve asked about most other metrics in this series: What information do they contain that might inform management decision making?

With understandable justification, firms pay attention to their PPP vis-a-vis other firms in what they perceive to be their competitive set. They don’t have much choice if they want to be attuned to the risk of partner flight (the partners are paying attention, I can assure you). But if you ask the next question—”So what are you going to change if you think your peer-group PPP is too low?”—prudent and sustainable answers aren’t obvious, or at least the answers that meet one or both of these conditions require time to implement. Short term fixes will be just that.

Across firms outside your peer group, I submit that comparative PPP is nearly meaningless.


Above and beyond all this is a far larger question we don’t seem to attend to sufficiently: Since when is what we pay management a measure of the strength of an enterprise?

We are all marinated so deeply in the PPP stew that we lose sight of this.

In what other industry would an analyst even dream of using executive compensation as a yardstick for a firm’s health, competitiveness, or even viability in the market? If anything, you might suspect they’d be negatively correlated. Put another way, when was the last time you saw a reporting company publicize figures on its management compensation levels, say, in its 10-K or annual report, as a competitive advantage or conversely as a risk factor? It’s “immaterial” in almost any sense that comes to mind—strategically, financially, or pursuant to Rule §10b-5.

At the risk of offending those who subscribe to the gospel of lawyers’ always knowing better—better than all of them!—the prominence of PPP in our industry-wide financial reporting is just plain weird.

“Hold on,” you’re thinking, and I will and I am.

Here’s what PPP is highly germane to:

  • The risk of partner flight to peer-group firms (see above), which is to say at the extreme the firm’s survival itself.
  • And the ability to recruit top-notch talent and pay it market rate.
  • If you believe as I do that among other things Law Land is engaged in an ongoing war for talent, then management ignores PPP at its peril, and every MP and executive committee member I’ve ever met knows this.

So in what sense dare I minimize its importance in measuring the health of the enterprise?

At this point discretion advises that I let a reader, who prefers anonymity, describe what I’m driving at.  This from an email I received in response to earlier installments in this series. He responded to my theme thus:

If [you’re seeking] a way of measuring the health of the firm as opposed to how much it is paying its partners, then I do agree that aspirationally that would be the most valuable thing to do. Things like, how much debt does the firm have, how strong is the culture, how dependent is it on a small number of practices, or clients, or partners, versus having broader support for its revenue and profit.  And more importantly to the long-term viability of the firm, to what degree do lawyers (partners and associates) feel connected to the institution, proud of the institution, loyal to the institution, etc.  In most ways, [these are] more important than per partner compensation metrics, at least within a range.

Our friend has nailed it.

As I analyze the meaning of PPP from a managerial and strategic perspective—its information quotient, if you will—I’m drawn to the conclusion that it matters only at the extremes: When it’s so low vis-a-vis your competitive set that headhunters begin their relentless circling, or conversely at the top of the scale where you need to land XYZ superstar and your compensation scheme does, or does not, put that in the realm of possibility.

Put more bluntly, glaringly uncompetitive PPP is an all-hands-on-deck crisis, and if you’re going after the superduperstars, you need the heaviest artillery any firm can muster.

Inbetween those extremes? I believe, as our friend evidently does, that it needs to be “within a [satisfactory and sufficient] range.” But our obsessive focus on year to year changes at this firm or that firm in the (-3%) to +3% range is, well, obsessive. Few firms are on the knife edge of survival and even fewer of us are Scott Barshay.

At the risk of stating the obvious, PPP also has next to nothing to do with the compensation of staff, business professionals, and associates, and very little in reality to do with the compensation of your rank and file B Team partners—the solid citizens who get the vast majority of the work done day in and day out, and who Jack Welch called “the vital 70%.”  These are the people who actually comprise all but a vanishingly small proportion of the talent in your firm.

As our friend implies, these people need to be compensated fairly and squarely in light of their marketplace alternatives, but beyond that what gets people out of bed in the morning is feeling connected to a vision:  Building an organization with values they believe in over the longer run.

Inadequate compensation for all these folks—staff, business professionals, associates, and B Team partners—will gut your firm.  But if a 15% raise would lure them across the street, you have a deeper and different problem.

Laszlo Bock, Senior Vice President for People Operations at Google, a company that’s in a war for talent if anyone is, recently expressed it thus in an interview about what Google does to retain its winning players:

People look for meaning in their work. Mission. Transparency. Voice.

This is the truly “vital” conversation for your firm as an enterprise oriented toward the long run, and PPP has, I submit, nothing to contribute to that conversation.

Incorrigible believers in PPP may be persuaded by none of this, but has three decades of accepting PPP as the dominant and first-among-equals metric really helped us understand what our businesses are all about? What, for example, does PPP bring to the conversation about, “What do law firms sell?”  Or about, “What do clients want?” Or about, “What’s our internal glue?” Or about, “What [if anything] are we building here together?”

I come back to where we started this dive into PPP.  Do we really believe that the #1 financial yardstick for our firms is how much can we pay each other?

Seriously?

I won’t go any further today down the road from reason and a bit of emotion into ethics, but you might be moved to do so on your own time.


So what metrics might I suggest? For that, you’ll have to await the next installment.

images

 

Related Articles

Email Delivery

Get Our Latest Articles Delivered to your inbox +
X

Sign-up for email

Be the first to learn of Adam Smith, Esq. invitation-only events, surveys, and reports.





Get Our Latest Articles Delivered to Your Inbox

Like having coffee with Adam Smith, Esq. in the morning (coffee not included).

Oops, we need this information
Oops, we need this information
Oops, we need this information

Thanks and a hearty virtual handshake from the team at Adam Smith, Esq.; we’re glad you opted to hear from us.

What you can expect from us:

  • an email whenever we publish a new article;
  • respect and affection for our loyal readers. This means we’ll exercise the strictest discretion with your contact info; we will never release it outside our firm under any circumstances, not for love and not for money. And we ourselves will email you about a new article and only about a new article.

Welcome onboard! If you like what you read, tell your friends, and if you don’t, tell us.

PS: You know where to find us so we invite you to make this a two-way conversation; if you have an idea or suggestion for something you’d like us to discuss, drop it in our inbox. No promises that we’ll write about it, but we will faithfully promise to read your thoughts carefully.