More on Non-Equity Partner Tiers

March 18th, 2008 by Jim Cotterman

I mentioned in my last post that creating a non-equity tier as a place to put your under-performers is a bad use of a tiered structure.  Other similarly weak reasons to create a tiered structure include managing earnings (profits per equity partner) to appear more profitable in the published rankings; to restore operating leverage; or to create a place to put “technicians”.  Compensation equity, operating leverage, quality control, admission standards, performance evaluation and motivation are all solvable and are independent of partnership structure.  Partnership decisions, like compensation decisions require discipline and rigor.  Tiers should not become dumping grounds for the mediocre.

As Professor William Henderson at the Indiana School of Law writes in his May 2006 paper titled An Empirical Study of Single-tier Vs. Two-tier Partnerships in the AmLaw 200, “…this study documents that average PPP are significantly higher in single tier firms, even after controlling for geographic market segment and firm leverage.  The higher profitability of single-tier firms appears to be a function of higher levels of prestige, which enable single-tier firms to (a) attract and retain a more lucrative client base, and (b) run a more rigorous promotion-to-partnership tournament in which associates work longer hours and are less secure in their futures with the firm…”

So should anyone consider a second tier?  Perhaps.  There are still some benefits to a second tier including  establishing a career option for critically important senior advisors and the very best technical specialists who do not want the responsibility of full ownership — the “pride of partnership”; or, as a proving ground for those who have yet to demonstrate sustained business generation in acceptable quantity and quality but who you consider are more likely than not to do so.  Undertaking tiers still requires carefully stated objectives (including how this structure relates to the firm’s strategic intent; clearly articulated rigorous admission standards for both tiers; that the firm design the tier to be a desirable career path; and, that the equity partners reach consensus that this is a good thing to do.

This entry was posted on Tuesday, March 18th, 2008 at 6:18 am and is filed under Partner compensation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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