AmLaw 200 Survey; Equity Comp Ratios; Go Big… or Go Small

The publication of the AmLaw 200 survey last month confirmed that 2021 was a very good year for the AmLaw 200.  101 firms saw double digit revenue growth. Relatedly, only 7 firms lost revenue.  Firms with more active corporate / M&A practices saw greater revenue increases, while litigation boutiques like Robins Kaplan, Boies Schiller, Kobre & Kim saw revenue decline (The AmLaw 200 Excelled but Their Future Hinges on How They Use Profits, Dan Roe, 5/24/22, American Lawyer).

As in most years, the Am Law 100 continued to outgain the Second Hundred, increasing revenue per lawyer (RPL) by 12.5% and profits per equity partner (PEP) by 19.4%, compared with the Second Hundred’s 7.7% RPL growth and 11.8% PEP growth (The 2022 Am Law 200: By the Numbers, ALM Staff, 5/24/22, American Lawyer).

The compensation spread between AmLaw 100 and Second Hundred partners continues to grow.  The average partner in the Am Law 100 earned over $1 million more than average partner in the Second Hundred ($1.72M v. $710K) (The AmLaw 200 Excelled).  That gap increases significantly among equity partners ($2.664M among AmLaw100 vs. $965K among Second Hundred), which can be partially explained by the leverage differential, 4.08 lawyers to 1 equity partner in the AmLaw 100 vs. 2.18 lawyers to 1 equity partner in the Second Hundred (AmLaw 200 Survey; By the Numbers).

Comp Ratios

The American Lawyer also published its annual survey of equity partner compensation spreads, which reflects the ratio of a firm’s highest-compensated equity partner to that of its lowest-compensated equity partner.  The American Lawyer collects this data as part of its annual AmLaw 200 survey, and about half of the AmLaw 200 provided comp ratios. 

There was little difference between the median ratio of the AmLaw 100 (8.9 to 1) and that of the Second Hundred (9 to 1) (2022 Am Law Compensation Ratio, 5/18/22, The American Lawyer). The median spread for both groups grew modestly compared to 2020.  Industry analysts believe that spread growth is part of a growing trend, as firms seek to retain and attract key partners, in an era of increased mobility (Partner Pay is Still Spreading Out as Lawyer Mobility Accelerates, Andrew Maloney, 6/6/22, American Lawyer).  Even elite firms such as Cravath, Swaine & Moore; Davis Polk & Wardwell; and Cleary Gottlieb Steen & Hamilton have abandoned a pure lockstep partner pay system in recent years.

Go Big…or Go Small

Kent Zimmermann and John E. Morris of the Zeughauser Group provided excerpts to the American Lawyer of their new book “Law Firm Mergers: Lessons From Successful Strategic Combinations.”  In support of growth through mergers, they tout the virtues of creating a flywheel that sustains itself once it reaches a certain speed; “highest-performing firms in any given market attract more sought-after talent, they in turn draw more high-quality, high-rate business, which supports further growth in profits and more recruiting” (Why Law Firm Mergers Are a Growing Reality for More Firms, Kent Zimmermann & John E. Morris, 6/2/22, American Lawyer).  Flywheel aspirations aside, the increasing cost of cybersecurity and technology necessary to serve clients in banking and healthcare may drive further consolidation among firms with those client bases (The AmLaw 200 Excelled). 

The first couple quarters have seen significant group and partner movement to larger firms.  Some theorize that the pandemic has diminished the relative quality of life advantage of firms in the Second Hundred, as remote work weakened cultural ties and the pandemic exhausted everyone (As Big Firms Gobble Up Talent, the Second Hundred Are Feeling the Squeeze by Partner Defections, Dan Packel, 5/24/22, American Lawyer).

That said, there is still movement in the other direction as well. Reasons include increased rate flexibility, reducing conflicts, and escaping ever-increasing overhead (Higher Billing Rates, More Reflection Are Leading Some in BigLaw to Go Small, Andrew Maloney, 5/11/22, American Lawyer). 

For merging firms, as well as for group and individual partner moves, predicting future revenue is complicated, since the past two years may have been inflated by circumstances unique to the pandemic (What to Expect with Mergers, Leverage, Costs, Clients, and Morale, Law.com Pro Executive Briefing, 5/23/22).