The Significance
As nonequity tiers grow, “there’s going to be a balloon of individuals, theoretically, ready for equity partner. And given the equity partner promotion ratios, they could be looking at a long-term problem,” noted law firm consultant Brad Hildebrandt, chair of Hildebrandt Consulting.
Indeed, law firms may have too many lawyers up for promotion to equity in the next few years, or those who are nearing the end of a lateral contract with guaranteed compensation.
Another challenge law firms face is making sure that the growing cohort of nonequity partners aids profitability rather than hampering it. Can these nonequity partners bill out and bring in significantly more money than they are paid as a whole?
Some large firms have already figured out how to make the nonequity tier profitable. Just look to law firms such as Kirkland & Ellis and Latham & Watkins, which have operated large two-tier partnerships for years and have seen growing profits per equity partner over time.
But the challenge of ensuring profitability from nonequity partner ranks may be most pronounced for those newer to the system or those firms that are approaching a partnership where the nonequity ranks begin to outnumber the equity tier.
On the individual level, lawyers who stay in the nonequity partnership tier indefinitely may face different expectations than an equity partner, and as a result, opportunities inside a firm may differ.
Are they still expected to grow a client base over time? Will they try to promote work for other departments to attempt to deepen a firm’s client relationship? Is the firm offering them opportunities for office, practice, or firmwide leadership? Will they treat their firm as a “home” if they don’t have the same risk/reward elements in their compensation package? And will that change law firm culture?
The Information
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The Forecast
Regardless of these questions, increasing the nonequity partner ranks appears to be working for most of the Am Law 100. As big firms closely manage who is in their equity tier, firms’ profit margins are growing over time.
Despite a year where the deal market lagged, Am Law 100 firms collectively saw average profits per equity tier rise 9.3% to $2.80 million in 2023 and compensation for all partners (including the equity and nonequity) rise by 6.2% to $1.75 million. That comes in a year where the Am Law 100 firm equity ranks contracted by 1%.
It’s a safe bet to predict that Am Law 100 nonequity partners will soon outnumber equity partners. Already, Am Law 20 law firms such as Kirkland, DLA Piper, Baker McKenzie, Sidley Austin, Hogan Lovells and Greenberg Traurig have profited from a larger proportion of nonequity partners compared with equity. But will it work, financially and culturally, for all big firms?
