To give partners equity or to not give partners equity—that is the question.
As many large law firms are going the way of non-equity partners in order to grow profitability and retain talent, a new report by Bloomberg Law points out the long-term financial risks this structure entails for a firm.
Bruce MacEwan of Adam Smith Esq. explains, non-equity partners end up becoming "the least hard-working bunch of lawyers—they bill the fewest hours consistently." In fact, a recent Reuters analysis found that non-equity partners bill anywhere from 7 to 11 hours fewer per lawyer per month.
"A non-equity partner tier needs to be managed gingerly," says Michael McKenney of Citi's law firm, who suggests associates are more economical than partners. "Oftentimes it is very difficult to get the same level of contribution out of the income partner as you do from your seasoned associate…the expense per lawyer number gets out of whack."
Meanwhile, a study by Fairfax Associates finds that the gap in pay for equity partners both between AM100 and the second AM100 firms is widening, while also widening within firms themselves between highest-paid partners and lowest.
According to the study, "more firms are adding levels to the top end of their compensation scale to pay top performers. This is stretching the ratio of top to bottom compensation substantially, and ratios of 8:1 to 10:1 are becoming common, and higher ratios are not unusual." And between first and second tier firms, "over the last 5 years (2019 to 2023) the average profits per partner of the AmLaw 100 firms has increased 44% and the AmLaw 2nd 100 by 22%."
Limited Equity Partners
Is there a pay structure that can straddle both non-equity and equity options, but still help the firm grow profits? Fairfax suggests that "the limited equity partnership is an elegant solution to many of the challenges of non-equity partnerships today, and one we have worked with a number of our law firm clients to implement. The idea of a limited equity partnership is that those partners have a stake in the firm, albeit small initially, and share in the risk and rewards of the firm."
The Verdict
As the legal world continues to evolve into a more cyclical business model with outsourcing to ALSPs, the pay structures of firms big and small need to adapt as well. Whether that means adopting a non-equity model for partners, or a limited-equity approach is a question that firms will continue to grapple with.
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