This is a tale of large law firms departing from traditions. What a concept — who knew it was possible! Especially when the result is more partners. To share in the profit pie? Not so fast. Let me explain.
For a very long time, most large law firms have had only one class of partners. Those were “equity partners”, who had achieved the highest level of practice in the firm and were rewarded by sharing in the profits after buying in (sometimes at hefty sums) as owners of the firm. All other lawyers in those firms were salaried lawyers (associates, of counsel, or contract partners). Those categories of lawyers were guaranteed a certain salary, as determined by management each year or by contract, but they did not share in the profits of the firm.
So, in a banner year when profits for the law firm were high, only equity partners benefited from that success in terms of compensation. And in a year when losses not profits were the theme, only partners shared in the losses. However, profits and losses did not have an effect on the compensation of lawyers in the other categories — unless, of course, the losses caused the firm to go out of business. In that case, compensation issues typically were decided by judges or through arbitration.
As recently as a few years ago, things started to change. A few Big Law firms moved to two classes of partnership: Equity partners and nonequity (salaried) partners. And now changes to two classes of partnership has become a trend. 2024 was the year when most Big Law firms decided to join the party. The result is that two tiers of partnership was once considered radical, but that is no longer the case. You may wonder why.
It is all about competition — specifically, competition for talent. The top law firms were all competing for what they perceived as the top talent, and the top associate talent started jumping ship when the title of “partner” was within reach at a rival firm.
Two tiers of partnership means that junior lawyers are able to achieve the coveted “partner” label earlier in their careers. And that is a very attractive lure. Instead of it taking ten years plus to be let through the equity partner gate, a lawyer with only eight years of practice experience can become a partner —- albeit the salaried variety.
This new approach to partnership also worked fine for the equity partners. They did not have to worry as much about losing talent AND the change from associate to junior partner did not dilute the profits that were divvied up among the equity partners. And, speaking of those profits, non-equity partners typically command among the highest rates at the firm, which means more profits at the equity level. So, it was a win-win. And a very popular win-win it seems.
Bloomberg Law has reported that the largest law firms in America could soon have more non-equity partners than equity partners by the end of 2025. Sounds good, right? Yes, good for the equity partners who will have more young lawyers on their teams who are compensated at a lower rate than equity lawyers and might be willing to wait longer for the opportunity to become equity partners. Not good, however, for the nonequity partners when there are more contenders for equity partnership when their time comes. In fact, it has been queried whether the nonequity partner tier is a parking lot or a ladder.
Clearly, it is a mixed bag. Keep your eyes on how this change works out. Sacrificing traditions is not always a sure bet.