Do Non-Equity Partnerships Still Make Sense?aderantuser
Non-equity partner positions became incredibly popular with firms over the past 20 years, so much so that by 2006 about 80% of the 200 largest U.S. firms employed non-equity partners. As Bloomberg BNA recently reported, major law firms adopted the two-tier partnership structure mainly for economic reasons. More specifically, “A class of non-equity partners on top of partners with an ownership stake created a win-win scenario, it seemed: the firms found a place for talented senior lawyers who may not have the business of a senior rainmaker, while a partnership with fewer equity members provided higher profits.”
Since the financial crash in 2009, however, firms have begun rethinking the non-equity partner system. As Bloomberg noted, “With less work around, non-equity partners created an impediment to associates’ advancement to partnership; and secondly, the financial toll of keeping a large number of unproductive partners around, even if they didn’t have an equity stake, became too costly.”
The compensation for non-equity partners is also starting to suffer. The 2014 Partner Compensation Survey from Major, Lindsey & Africa found that as the importance of originations in partner compensation systems has increased. “The gap between Equity and Non-equity partner pay is wider than before. Average Equity partner compensation is $971,000, as compared to the Non-equity partner average of $338,000.”
If firms are beginning to question the non-equity position, and compensation is lagging for those partners, should those partnerships continue? The answer is not as clear as you might think. Any change to the existing system begs the question of what to do with all those non-equity partners? Most firms aren’t interested in massive layoffs, and are even less interested in massively increasing their equity partnership ranks.
The ABA Law Practice Today published an interesting recent post from an anonymous non-equity partner titled How to Avoid Non-Equity Purgatory. They point out that “Non-equity status was designed for those lawyers who were partner material, but for whatever reason, didn’t want to make the same investments as an “owner” of the firm. Most of the non-equity partners chose that status. For some, it was a transition as they got older to wind down their practice. For others, financial considerations were the key. Still others made a conscious lifestyle choice to not invest the same commitment (in time and capital) as equity partners.”
Nevertheless, argues the anonymous non-equity partner, you risk being trapped in non-equity purgatory if you don’t advocate for yourself within your firm. Regardless of your official status, you must make your ambitions known to the equity partners, and more importantly, bring in work. The ABA article noted that “As much as your firm may tell you that other stuff counts, it doesn’t. Business matters. A lot. I have learned that it is basically all that matters.”
Although the non-equity partner model may be under pressure, it’s not going away any time soon. The current thinking seems to be that firms need some non-equity positions to protect the profits of the equity class, but not so many that their associates’ path to partnership is blocked, or that clients begin to question the structure.
Many legal experts are not big fans of the non-equity partner system. They feel that clients would be better served with clear associate/partner roles. In today’s environment, where client demands are driving so many changes within the firm, it seems reasonable to expect that clients may ultimately drive the evolution of the non-equity partner system as well.