The Significance
Clearly, nonequity tiers are likely in a firm’s best business interests to launch and expand. But as firms grow them, these tiers come with risks that need to be addressed – or else firms risk snowballing consequences.
For one, Law.com has reported that decisions over who falls into the non-equity tier often lead to tensions—and some exits. When some partners are de-equitized into the nonequity tier, for instance, these lawyers are motivated to find other law firm homes. Sometimes that's part of a firm's plan, but not always.
When law firms bring on lateral partners—sometimes with large guarantees—this can create further tensions with nonequity partners. In particular, some nonequity partners have complained that they are partly subsidizing the compensation package of laterals, or that they are being turned down for higher pay and promotion opportunities.
And as firms build up the nonequity tier, some lawyers feel there are “moving goalposts” to obtain the brass ring of finally moving into the equity tier, with a lack of transparency over the process. Some observers say this can disproportionately impact women and diverse lawyers who are stuck in a “parking lot” in the nonequity tier.
The tension within the nonequity tier has even resulted in recent litigation. Duane Morris was hit with a class action suit in California federal court over the summer, alleging that nonequity partners, despite being taxed as partners, function legally as employees at the firm given the stability of their compensation, regardless of overall firm performance and their lack of influence over firm policy decisions.
The Information
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The Forecast
Never have law firms had to balance so many business and cultural issues at once.
How do they walk the line of retaining and attracting top talent but still create cultures that are compelling and rewarding for all ranks of lawyers and professionals? The nonequity tier could be either a panacea or a source of more problems. As one Am Law 200 law firm leader said, "One of the problems with the two-tier partnership is that some partners feel like lesser class citizens than other partners.”
The two-tier partnership law firms that will likely succeed with the structure have a transparent approach to the equity partnership and a promotion timeline that hasn’t grown over time. (Kirkland & Ellis notably changed its policy a few years ago to shave off a year in the promotion process, now minting equity partners after nine years instead of 10.) The most strategic law firms are also using the "income partner" path as a springboard to be a successful equity partner, so these lawyers are less likely to fail once they move up.
How firms manage the advantages and risks of ballooning nonequity tiers will ultimately factor in their success and reputation among current and future talent. The question will loom large over firms, amid the need to gain scale and merge cultures during any firm combinations.
