The People Have Spoken (on PEP)

A couple of weeks ago, I asked you whether profits per partner were the proper measure of firm success, borrowing from and building on the thinking of Guy Beringer, a senior partner at Allen & Overy.  In that piece I included a poll, and enough results are now in to report back on what you said.  Here are the results:

Bottom line:  Only 20% of you voted in favor of PPP in any form, whereas 80% of you rejected it.

Specifically, with the question being "Is PEP A Proper Measure of Success?:"

• At the extremes, a mere 9% voted for "Of course; the goal of any firm is to maximize shareholder value, and PEP is our equivalent"
• But at the other extreme, more than 5 times as many of you—49%—voted for "Absolutely not:  Guy is right, and the Emperor has no clothes."
• 6% voted for "Yes, it's the key, although there are other measures."
• 4% chose "Yes, nothing will ever be sexier,"
• And a very lonely 1%—representing a single vote—selected "Yes: I believe it's accurate and highly informative."
• 11% gave what could be characterized as the most tepid of responses, which I still read as a rejection of PEP in principle:  "The question is irrelevant; it's too entrenched to be challenged."
• 19% said its day has come and gone:  "At one point it was informative, but it's outlived its usefulness."

And where do I come down?  Were I forced to choose a single response to the poll, it would be "Absolutely not..." 

At a somewhat more nuanced level, it's not mine to gainsay that PEP is indeed sexy, that it tells part of the very important story of how a firm is doing in rewarding its owners ("shareholders"), and that it can be a potent advertisement for attracting laterals.

But as I said in the original piece, it shares all the vices and defects of quarterly earnings reports in corporate land, and then some.

It's extraordinarily manipulable, with caustic consequences for firms willing to hack away at the denominator without taking steps that would lead to sustainable growth in the numerator.

Somewhat akin to the US News & World Report college rankings, its unintended consequences have grown monstrously and now completely subsume its original usefulness.

Most important, it's just plain inadequate as a measure of the fundamental underlying economic health of a firm.  Far more revealing, in my mind, would be a more extended time-series (three to five years) of growth in gross revenue, or revenue per lawyer.

And for those of you carrying the torch for PEP, and now on the four to one losing end of this vote, I commend to you the immortal words of the late politician Mo Udall (1922—1998) who, upon finishing second in his fifth presidential primary in a row, opined:  "The people have spoken.  The bastards."