The explosive growth in non-equity partners is forcing law firm leaders to change how they manage their operations to avoid harming long-term financial goals.
The non-equity tier has become a preferred method for firms to retain talent and boost profitability. Growth of the class gained steam during the pandemic when law firms were exceptionally busy and wanted to hang on to lawyers who could do work at high levels.
Eighty-five of the 100 largest law firms by revenue have non-equity tiers, and 70 of those have increased in size since 2021, according to American Lawyer data. By next year, there will likely be more non-equity partners than equity partners among the top 100 firms.
The growth has brought about questions as to how firms motivate and reward performance without the incentive of possibly millions of dollars in equity payouts. The non-equity tier has become so crucial to firm operations that managing it well largely dictates the overall operation’s success.
Law firms must develop cultures of rigorous accountability to make non-equity partnerships work, said John Morley, a Yale Law School professor. That is “deeply in tension” with the almost familial connections firms want to have, though it’s the only way the non-equity tier is effective, he said.
Seyfarth Shaw is “very disciplined” to make sure non-equity partners have the same quality and work ethic as those who take home a profit share, said Lorie Almon, the firm’s chair and managing partner. “We don’t dampen the standards in any way,” she said.
Business Case
The business case for adopting a non-equity tier is straightforward. The class helps firms keep young talent who gain the title of partner and can bill clients at higher rates than junior associates.
Firm leaders get the benefit of keeping non-equity partners out of the group that draws profit checks, meaning there’s more cash for the people at the top. It thus becomes easier for firms to grow profits per partner, a metric the industry uses as a barometer of overall success.
The danger is that firms fail to manage their non-equity tier properly, said Bruce MacEwen, president of law firm consultancy Adam Smith, Esq. Firms in those situations are saddled with “the least hard-working bunch of lawyers—they bill the fewest hours consistently,” he said.
A 2023 report by Reuters found that nonequity partners typically billed between seven and 11 fewer hours per lawyer per month than equity partners, translating into a sizable gap in revenue.
A non-equity partner tier needs to be managed gingerly, said Michael McKenney, a senior client adviser in Citi’s law firm group. Firms sometimes find that associates are a better bargain, he said.
“Oftentimes it is very difficult to get the same level of contribution out of the income partner as you do from your seasoned associate,” McKenney said. “The expense per lawyer number gets out of whack.”
Law firms such as Kirkland & Ellis and Paul Weiss have developed “star-driven models” with immensely productive partners at the top who are capable of employing large teams of more junior lawyers in the middle and at the bottom, Morley said. “But if you don’t have that, then this model doesn’t work as well,” he said.
Kirkland successfully manages its non-equity tier by carefully monitoring productivity and then moving out the least productive partners—even leveraging its alumni network to find landing spots for them, MacEwen said.
Partner Profits
Some law firms demote people from the equity partner tier to the non-equity class as a way to boost their profits per equity partner number, according to a person familiar with the industry who requested anonymity to discuss a sensitive topic. The person declined to publicly identify examples of such firms.
“It is becoming more difficult to graduate, if you will, into the equity tiers of many firms,” said Jennifer Henderson, a co-founder and partner at legal recruiting firm Hatch Henderson Fivel. “A lot of that has to do with firms increasingly focused on their profits per partner number,” she said.
Of the 85 firms that have non-equity tiers, only 15 increased the size of their equity partnerships since 2021, according to American Lawyer data. Only two—Kirkland and Seyfarth Shaw—have increased the size of both tiers.
The average profits per equity partner at the 100 largest firms grew more than 5% in 2023 compared with from 2022, a Wells Fargo & Co. survey found. Simpson Thacher confirmed this month it would pay its top partners more than $20 million a year.
A reason for big firms’ push to grow the non-equity tier is to keep pace with their largest rival, Kirkland. That tier, with over 900 lawyers, has been an important engine in the firm’s meteoric financial success. Kirkland brought in just over $7.2 billion in revenue in 2023, 24% more than its closest competitor, Latham & Watkins.
“Kirkland & Ellis is the 800-pound gorilla that is breaking everybody else’s business model,” Morley said. “They found that offering the title of partner was a very effective recruiting tool, even when it didn’t come with equity attached.”
Paul Weiss confirmed earlier this year it had added non-equity partners, and Cravath Swaine & Moore adopted the approach in late 2021. Simpson Thacher & Bartlett, along with Willkie Farr & Gallagher, created non-equity tiers in 2019.
Kirkland, Holland & Knight, Goodwin Procter, Willkie Farr & Gallagher and Wilson Sonsini have grown non-equity partnerships by 25% or more since 2018. Even among firms that have not yet added a non-equity class, “most of them are at least discussing it,” said Lauren Drake, a recruiter for Macrae.
