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This year it finally happened. One of Washington’s Big Four firms finally saw its local profits per partner hit the magical million-dollar mark. So three cheers for the new millionaires at Hogan & Hartson, and best of luck next year to their competitors at WilmerHale, Arnold & Porter, and Covington & Burling, right? Not so fast. Though profits per partner (PPP) is often viewed as the key barometer of a law firm’s success, taken alone it can give a misleading reading of partner pay and a firm’s true financial condition. A closer look at how Hogan’s numbers stack up against those of Wilmer, Arnold & Porter, and Covington demonstrates why. The first key point to keep in mind is that law firms differ greatly in how they choose to define the term “partner.” WilmerHale, Arnold & Porter, and Covington use the designation in more or less the same way. Each partner owns an equity stake in the firm, and his or her compensation is closely tied to the firm’s overall performance. If the firm takes on too much pricey real estate or gets stiffed by a big client, even the youngest partners will feel the pinch. At Hogan, however, more than a quarter of the partners in Washington are “nonequity” partners, meaning that, like associates, most of their pay is in the form of a salary. Most of the large firms surveyed by Legal Times and its sister publication The American Lawyer have a two-tiered partnership structure like Hogan’s. Nonequity partners at these firms are often younger lawyers newly promoted from the title of associate, older lawyers who are slowly being put out to pasture, or newly acquired laterals who have yet to demonstrate their earning power. And they earn a whole lot less than their equitized colleagues. At Hogan, nonequity partners average just $320,000 annually. But because the profits-per-partner figure measures only the compensation of equity partners, many of the freshly minted and lowest-paid “partners” at firms like Hogan don’t count toward the firm’s PPP. That makes for an unfair comparison between Hogan’s PPP and that of rivals such as WilmerHale, Arnold & Porter, and Covington, where even the newest partners are given equity status. A better overall measure is average compensation to all partners, which includes pay to both equity and nonequity partners. By that standard, Hogan not only isn’t beating the three other big D.C. firms, it’s running in dead last. The stats: Covington, $975,000; WilmerHale, $915,000; Arnold & Porter, $835,000; and Hogan, $800,000. Hogan, at least, hasn’t pulled up the ladder on its equity partnership. Last year its number of equity partners in Washington rose by 5 percent — about the same rate that it added associates and other lawyers. Other firms, however, are shrinking to grow, boosting profits per partner by taking steps to trim their ranks of equity partners. Akin Gump Strauss Hauer & Feld’s PPP in Washington spiked 31 percent over the past year, even though the firm generated less revenue here than in the year before. A big reason: The firm cut the number of equity partners in Washington by 12 percent. “We’re very, very focused on our profits per equity partner,” says R. Bruce McLean, Akin Gump’s chairman, when asked about the trend. Akin Gump wasn’t alone in draining its pool of equity partners. In 2004, just ahead of its merger with Pillsbury Winthrop, the firm formerly known as Shaw Pittman drew the long knives and lopped off more than half of the equity partners from what had been a single-tiered partnership. The firm’s number of equity partners fell from 99 in 2003 to 43 by the end of 2004. That helped the firm boost its profits per partner a remarkable 44 percent from 2003 to 2004. But the creative accounting didn’t mean the firm’s balance sheet had improved from top to bottom. Its average compensation to all partners, including those unlucky partners who were de-equitized, actually fell slightly to $535,000. In 2005 that figure barely moved, continuing a four-year trend during which Pillsbury Winthrop Shaw Pittman’s average partner pay has remained essentially flat in the District. Howrey and Morgan, Lewis & Bockius have also pared the ranks of their equity partners in recent years, and a number of other firms have held their equity partnership steady even as revenues have soared. A third tool for measuring a firm’s productivity is revenue per lawyer (RPL), which is a direct reflection of the rates a firm is able to charge and the number of hours it gets each lawyer to bill. By that measure, Williams & Connolly is the most successful firm in Washington, topping even the transactional heavyweights at Skadden, Arps, Slate, Meagher & Flom. But this number is heavily influenced by a firm’s leverage, or its ratio of higher-billing partners to lower-billing associates. In Washington, 45 percent of Williams & Connolly’s lawyers are partners, while at Skadden, that figure was 22 percent. Nevertheless, a steadily improving RPL year after year is perhaps the best measure of how well a firm is doing in the legal marketplace. Profits per partner may be the first statistic partners look at when considering a lateral move or a vote to merge firms. But it shouldn’t be the only one. D.C. lawyers are a clever bunch, and it’s hard to believe they won’t notice that a firm that sends its PPP soaring by jettisoning equity partners isn’t necessarily a firm on solid financial footing. But given current trends, it appears a lot of managing partners think otherwise.
Jason McLure can be contacted at [email protected].

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