The Ranks of Non-Equity Law Partners Have Proliferated

 By Elizabeth Olson, Big Law Business

In recent years, the number of non-equity Big Law partners has grown at a dizzying rate. Some firms used the category as a convenient niche to tuck lateral hires or under performing partners, and other firms viewed such salaried positions as an added step on the tall ladder to full partnership.

Non-equity — sometimes called service partners— nearly tripled from about 15 percent of all partners in the 200 largest law firms in 1999 to about 42 percent this year — in the past two decades, according to new calculations by Altman Weil, Inc., a legal consulting firm.

Some top firms have a heavy layer of non-equity partners, including Latham & Watkins, at 189; Kirkland & Ellis with 455; Sidley Austin with 349; McDermott Will & Emery with 355; and King & Spaulding with 200, according to 2017 partner compensation figures listed by the American Lawyer.

However, few firms willingly disclose their partnership gradations, preferring, instead, to lump all partners into one category. In some cases, this is because the category can be a convenient place to stash de-equitized partners without exposing their demotions. In other cases, it can be a breaking in period for lateral hires or, simply, a reluctance to share firm profits more widely.

Occasionally, firm turmoil from departures or restructuring can expose more internal details involving non-equity partners. Last year, for example, Shearman & Sterling decided to trim the ranks of lesser-performing equity partners, according to the American Lawyer. A September 2016 email from Shearman’s leadership that outlined a plan to create “a new non-equity partner role” to “allow junior partners to grow into equity partnership,” and to promote the firm’s growth appeared on the Above the Law website.

At the same time, Shearman and a number of Big Law firms have been embracing new tranches of business by hiring lateral partners, who can often be lodged in a firm’s non-equity segment.

Firm spokeswoman Jacinta O’Shea-Ramdeholl had no comment on Shearman’s non-equity partnership tier. Several other large law firms contacted by Big Law Business also declined to provide insight into their non-equity ranks.

“Non-equity partnerships are a hotbed of activity,” said Peter Zeughauser, a California-based consultant to law firms. “The category is growing larger because of so much lateral hiring. One (unnamed) firm partner said ‘every partner wants to bring along his caddy – someone higher than an associate that he can trust to do things without being trained up – and those non-equity partners are sometimes called ‘caddies.’”

The runaway non-equity ranks do have some dangers for law firms, warned James. D. Cotterman, a principal with Altman Weil. With lower client demand, he advised that law firms should have plans in place to better control — as well as wind down — the packed segment even though such partnerships can have their advantages. He outlined the dilemma for firms in a recently released paper called “What Should Law Firms Do About Non-Equity Partnership?”

Non-equity partners “can provide clients with significant experience, deep expertise, the ability to independently lead teams and manage portfolios dealing with sophisticated legal issues — and do all this at a billing rate a bit below that of equity partners,” he said.

Some lawyers choose non-equity partnerships because they are not required to make a five-figure investment in the firm, and are not involved in the event that the partnership is held liable for any wrongdoing. For others, it is a lifestyle choice that allows them to practice law without heavy demands of networking required to cultivate and land legal business.

Even so, Cotterman warned, there are downsides for firms with large numbers of non-equity partners because they work, on average, fewer hours than either associates or equity partners, according to some studies.

Cotterman recommends that firms institute “a slowdown in pay increases,” and noted that “more variable pay based on performance may be warranted.”

Another major reason this is worrisome for firm finances, his study found, is that an Altman Weil survey of law firm leaders that was released in May said firms reported that 52 percent of their equity partners were not sufficiently busy and 61 percent of their non-equity partners were underutilized. Such “overcapacity is diluting profitability” at nearly two-thirds of law firms, according to Altman Weil’s 2017 Law Firms in Transition survey.

Zeughauser agreed that swollen non-equity partner ranks are “too expensive, and astute firms are realizing they need to start addressing this issue.”

One step firms can take, Zeughauser said, is to thoroughly vet all lateral hires. Such lawyers are required to fill out lengthy questionnaires which ask specifics about clients, hours worked, bar discipline problems and sometimes even require attaching several years of federal tax returns to make sure the earnings claimed are accurate, he said.

However, sometimes such forms are not completed in the rush of hiring a lawyer who is seen as desirable to competing law firms, he said.

“That means sometimes people are hired who don’t perform as expected,” said Zeughauser.

While firms can try to ease non-performers off the payroll, it can be difficult because it can be leaked publicly. That was the case with Shearman, whose plans to overhaul its partnership were underway at a time when it started receiving additional scrutiny because it was involved in advising a well-publicized scandal that involved Wells Fargo bank creating millions of unauthorized customer accounts.

Remedies for non-equity attorneys can be harsh, though. Cotterman recommends that each year firms identify the bottom 10 percent in each segment of attorneys in the non-equity tier, and “most likely developing an exit strategy for each.”

 

Write to the reporter at egolson1@gmail.com.

Write to the editors at gabefriedman@outlook.com and csullivan@bloomberglaw.com.