Anonymous User wrote:Anonymous User wrote:I think we're going to see some market separation on this one. No way Jenner raises. Maybe not Mayer Brown either, given their leverage and the fact that they are already a third fiddle to Kirkland and Sidley in their home market anyway. O'Melveny is over $2ppp but has high leverage. Fenwick's leverage is almost as high and profits are a lot lower. Covingttton is Covingttton. While it's confusing that firms like Gibson and Latham haven't announced yet, the delay on this may indicate that a lot of firms have finally at least for now hit their ceiling.
Can you explain "leverage" and how that factors into this?
This has to be a troll. Whatever. Leverage is the ratio between partners and associates. At a high level, leverage shows you how many people on salary are supporting each partner that gets to share in the profits. If firm A has a revenue per lawyer of $1 million with a leverage ratio of 3 associates per partner and firm B has a revenue per lawyer of $1 million with a leverage ratio of 2 associates per partner, a partner at firm A is going to make a lot more money than a lawyer at firm B because they get to share profits from 3 associates rather than from just 2.
This comes into play here because, when you have to raise salaries and pay bonuses, partner's pockets get hit much harder for firms with high leverage ratios. If it costs $30k per associate to raise salaries and give summer bonuses (ballpark), then each partner at firm A loses $90k in profits because there's 3 associates per partner that will be getting a raise. A partner at firm B only loses $60k because there's only 2 associates per partner.
If that's not clear enough, think of it this way. Partners want as much money as they get, so they are going to be hesitant to pay a lot of money for raising associate salaries. But we can't just look at how much partners make (PPP) to determine how much they will lose out on. We also have to look at leverage ratio. Let's say firm C has leverage of 6 and PPP of $1.5 million, whereas firm D has leverage of 2 and PPP of $1.4 million. Riasing salaries to the tune of $30k per associate is going to have a much larger effect on partners at firm C. In fact, in this example, firm C will see PPP go from $1.5 million to $1.32 million. Firm D, however, will only go from $1.4 million to $1.34 million. Not only do partners at firm C end up with lower PPP now than their peers at firm D, but they lost a larger percentage of their cut (12% vs. 4%). Partners at firm C are going to be much more reluctant to move, even though they have similar PPP to firm D.