Blood, Sweat and Tiers

‘Tis the season of partner promotions. Firms are quick to publicize the practice areas and academic pedigrees of the newly elevated, but everyone omits one key data point: Which new partners have equity status, and which don’t? A couple months back, a law professor released an eye-opening study of nonequity tiers at the nation’s top 200 firms. The conventional wisdom — that firms use nonequity tiers to goose profit-per-partner figures — is wrong, concludes William Henderson, of the Indiana University School of Law at Bloomington. Single-tier firms — and there aren’t that many left — actually have higher profits, he found, probably because their greater prestige allows them to attract the highest paying clients and the most promising lawyers (think Skadden, Sullivan & Cromwell, Wachtell, Wilmer Cutler, Davis Polk).

Henderson’s study has been dissected over at Adam Smith, Esq.

Henderson theorizes that firms, such as Gibson, Dunn, that are adopting nonequity tiers are damaging their long-term prospects. Instead of benefiting from a Darwinian struggle for equity status, these firms will attract “a disproportionate number of lawyers who aspire to the less-demanding requirements of nonequity partnership.” And — ouch! — Henderson sees nonequity tiers as “primarily a bonding mechanism used by less prestigious firms to institutionalize a marginal product method of partnership compensation and consolidate voting rights for the benefit of the firm’s most powerful partners.”

But there are two pieces of the nonequity partner puzzle that usually go unremarked. Outside of the partners themselves, no one knows who has equity and who doesn’t. That includes, of course, clients. Elevating senior associates to partner status means you can boost the billing rate — and the equity partners pocket the difference. If you look at the Am Law 200 profit and salary data, it becomes apparent that at many firms, bottom-rung nonequity partners can’t make that much more than hard-charging senior associates.

A more worrisome aspect of the proliferation of nonequity status — at least for women and those who value diversity — is that it allows firms to appear to be sharing the wealth even if they really aren’t. According to the Bar Association of San Francisco, 63 percent of the firms responding to its survey earlier this reported that women made up at least 25 percent of the partnership. Two years ago, just 22 percent of surveyed firms could say the same. If most equity partners at a given firm are men, and most nonequity partners are women, who outside the firm would be the wiser? (And if you think this is the case at your firm, let me know.)

— Greg Mitchell
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