The use of a tiered partnership structure is common among larger law firms.  According to the 2006 Altman Weil Compensation Systems Survey 85% of firms over 100 lawyers use this structure.  Although those “partners” are slightly more likely to be treated as W-2 employees for tax purposes.

The range of thinking on this topic runs the gamut from cynic to advocate.  The cynics generally feel that it is one of the tools law firms use to manage earnings (PPEP - Profits Per Equity Partner).  Even though law firms are privately held businesses, their performance is a much discussed topic.  And a key ranking is based on the PPEP.  Just as public corporations dress up their financial statements, so now do law firms.  Another cynic view is that this just avoids making hard people decisions.  “We provide the easy out of a separate box to put people in rather than confront whatever issues are holding this person back.  If we can not say no at least we can say non-equity.”

Advocates espouse the additional time lawyers have to develop the skills a hyper-competitive market is looking for (code for the ability to generate an independent book of business).  They also point to this tier as an appropriate alternative for those lawyers whose career goals do not include equity partnership responsibilities.  By allowing these seasoned lawyers the opportunity to acquire the mantle of ownership (or if you prefer — the pride of partnership) you can retain talented individuals who have no desire to become full owners of the business.  Tier distinction is generally only internally known.  Therefore many clients will see the firm as having more “partners”, and those non-equity will be able to market as a “partner” likely getting work and rates different then when they were senior associates.  And if the commentary about the Millennial generation is true; then praising them with non-equity creates the “everyone is a winner” syndrome that they were raised with.  For more on the Millennial generation in the work force see the 60 Minutes program aired 11/11.

I like the career flexibility non-equity tiers offer, as long as the firm still is disciplined regarding rigorous criteria for admission into these ranks.