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.

The spread is usually described as a ratio of the highest paid partner’s income to the lowest paid partner’s income.  So a firm where the highest paid partner earns $1,000,000 and the lowest paid partner earns $100,000 has a spread of 10:1.  We are often asked about whether a particular firm’s compensation spread is appropriate.  There are two answers to that. 

The first is what most firms are initially asking — are we in line with what other similarly situated firms are doing?  Now the simple solution is to turn to survey data, determine the comparables and compare.  But let’s explore this a bit further.  Are we asking about all partners or just equity partners?  Firms with two tier ownership might be interested in a different number then a single tier structured firm.  Do we exclude the part-time or semi-retired partner?  Do we exclude the outlier partner at the top of the pay list who is an anomaly?  The ratio is going to vary, possibly quite a bit, based on how we address each of these questions.

What we have found in our research is that the acceptance of a greater spread (higher ratio) increases with size.  Also the differences between single tier and multiple tier spreads becomes noticeable in firms with more than 10 lawyers and significant for firms with more than 75 lawyers.  While smaller law firms (20 or fewer lawyers) are generally comfortable with all partner ratios under 3.0; large law firms (over 150 lawyers) are more likely to have all partner ratios of 4.0 to 9.9 to 1.0.  The diversity of views on this is remarkable.  6% of these large law firms have ratios in the 2.0 to 2.9 range while another 6% have ratios in excess of 20 to 1.

The second answer is related to the culture of the firm.  Here the answer depends on the individual firm’s ownership environment.  Some law firms manage the spread and some do not.  When they do manage it, the reason is often a cultural attribute.  It is their collective sense of propriety for the relationship among the owners.  A partner once asked me if I make 10 times one of my partners, is that partner really a partner of mine?  Interesting question that articulates the relationship that exists between pay and culture.  When the ratio is managed it is in a structured compensation/ownership system of points or tiers or similar arrangement.  Other firms take a decidedly different view — one that says this is an unimportant and/or irrelevant factor.  This is more likely in confederation style law firms or law firms that prize individual enterprise as the key differentiating factor.  Note that while one might expect that firms with formulaic compensation systems would have higher ratios, this has not been borne out in our research.  Certainly there might be a greater tendency for this result in a system that is unmanaged by subjective factors, but it appears that the lawyers drawn to law firms with such systems tend to join and stay together because there is not a significant performance difference among them.

Let’s begin with a slightly different perspective on the currently hot area of succession.  When we talk about the need for succession and transition within a law firm, we tend to focus on individuals age 60 and over and their role.  Today let’s focus on one position where a younger partner is more and more likely to find him or her self — Managing Partner. 

Managing partner used to be the final act.  Retirement afterwards was common.  But today we see more and more fifty something managing partners who are ready to step down from that post, having held it for five to ten years.  Still in their 50s, most do not seek to leave their firm or the practice of law.  Yet for many, particularly those who have left the practice for ten years to serve the firm’s interests, the return presents some challenges and questions.  One of those questions is:  “What happens to my compensation?”

The common refrain on this (if there really is one) is one year for every two years as managing partner with up to three years protection of current compensation.  We prefer a slightly more nuanced approach to this:  One year of no downward adjustment from the average of the last three year’s compensation position for each two years as managing partner up to a maximum of three years protection.  Position is different from compensation.  Position considers where the managing partner has been compensated relative to average, top, median and entry level partners.  The protection seeks to maintain the “sustained position” (hence the average of prior three years) as a floor for compensation of the managing partner during the post-managing partner protection period.  It does allow for the compensation to go down if the overall profitability of the firm declines, which we hope many would find a reasonable position.

But when a specific program is being developed, the common refrain or even my twist on it becomes a bit tricky unless the firm just wants to provide an unencumbered entitlement to the departing managing partner (which may be fine as well, if it is deliberate).  We believe there is a more fundamental question:  ”What do you do with a managing partner, when he stops being a managing partner?”.  The answer to that guides you on the answer to the program specifics.  And the answer to our question is driven by a number of variables: firm size, incumbent age, firm governance charter, practice area, clientele and the like.  What might make sense for the 70 year old managing partner of a ten partner firm who is retiring at the end of term may make no sense for the fifty year old managing partner who after ten years as managing partner of a two hundred partner firm is very much interested in returning to the practice of law.

• So it is helpful to engage in a dialogue about the following. The exact wording and scope will vary depending on the answers (some of which may already be well known by all parties).
• Is this for someone about to step down or is a new candidate requesting this before signing on for the job?
• How old is this person?
• How long has the managing partner been in the position?
• Was the position full-time (turn over of client relationships and cease practicing law)?  If not, how much did the managing partner position intrude on practicing law, business generation and market presence?
• What kind of practice and client following did this person have?  How permanent was the relationship transfer?
• How visible was the position in the market (i.e. did it have a high-profile public CEO face or was it more of an internal COO orientation)?
• What is the role of an ex-managing partner upon leaving the post (is there any transition, formal or otherwise expected of this person)?
• What kind of compensation program is used for the general population of partners?
• What compensation program is used for the managing partner position?
• What does this person want to do – We know the managing partner often says that he/she wants to return to the practice of law, but there are varying degrees of that statement and it helps to understand what each aide is thinking.

The best program is one that works to meet the managing partner and firm’s interests and considers the challenges and timeframes to transition from the formal leadership role of managing partner into the next role — whatever that may be.