Chart 2 goes to the heart of the matter. It shows a positive but weak relationship between average profit yield to equity partners and firm size measured by gross revenue. Note though that most of the largest firms (those over $1.5 billion revenues) yield below-predicted profit for their partners. Of these largest firms, several are multinationals and vereins in which very wide geographic differences in profitability may explain their relatively low profit yield relative to firm size. A large fraction of the smallest of the top 200 also are less profitable per partner than the overall average (see the concentration of firms of less than $500 million in revenues whose per-partner profits are less than $1 million).
The third chart tells us that there is almost no connection at all between profit per partner and firm size measured by the number of lawyers. The scatter of observations is very wide and the very biggest firms exhibit lower-than-average profit per partner.
There are several reasons why already-large law firms’ partners and managers might wish to see their firms grow. But when an incumbent partner contemplates an investment in growth and asks “Will this put more money in my pocket?” the answer cannot be supported by any broad statement about firm size among the American Lawyer Top 200. Indeed, the very wide distribution of profit per partner at all levels of firm size among the Top 200 is a caution against generalization.
Two factors connect firm-wide growth to incumbent partner pay outcomes. The first is whether expansion makes a firm more excellent in the eyes of clients and recruits. Excellence, however hard to define, generates demand, creates competitive advantage, justifies higher billing rates and attracts better candidates in the market for legal talent. Second, the payoff to incumbent partners for investment in growth depends importantly upon the way partner profits are distributed.
“Shared fate” pay programs in which partner compensation is determined less by individual partner accomplishment and more by “the size of the pie” will yield benefits to incumbents as long as new partners do not claim a highly disproportionate share of their incremental contribution to the firm’s profit. By contrast, incumbent partners in firms whose pay plan predominantly rewards individual contribution cannot expect much spillover into their pockets from firm growth not directly connected to them.
Two points are worth reiterating:
- There are reasons why growth is healthy for a firm even when it does not put more money in incumbent partners’ pockets.
- Among the top 200, the statistics show that when it comes to equity partner income, firm size matters hardly at all.
The original version of this article can be found on the Veltro website.