Tag Archives: Partner Issues

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Is it Better to Be an Equity Partner or Non-Equity Partner?

Last week we reviewed the evolution of law firm partnership economics, from the early days of a single-tier, all-equity partnership, to the emergence of a non-equity partner track, to the increasingly complex range of current partnership arrangements. We pointed out that as the economic models of partnership have grown increasingly complex and differentiated, so have the implications for current and potential partners.

This week we’re going to delve into those implications and challenge the traditional assumption that equity partnership is necessarily more attractive than non-equity partnership. On balance, equity partnership is likely still more rewarding in most cases. But for lawyers in certain situations, non-equity arrangements can have strong appeal.

Benefits of equity

Plenty of lawyers still aspire to become equity partners, and for good reason. Equity partnership slots are increasingly scarce, and in a profession that greatly values prestige and status, securing partnership shares is viewed as the pinnacle. The equity partners of a growing and profitable firm can expect to take home an outsized share of the financial rewards. Holding equity also gives a partner a stronger voice in firm governance in the form of voting rights.

Voting rights and partner compensation are often closely connected. For example, one factor that contributes to the equity partnership’s outsized compensation share is origination credit. It is common for firms to structure origination credit formulas to reward equity partners more than their non-equity colleagues. Senior lawyers often pursue equity partner opportunities to receive greater origination credit for their matters. Having input into how the formulas that award origination credit are constructed is an example of the potential value of voting rights.

Downsides of equity 

It’s easy to focus on the considerable benefits of becoming an equity partner, but there are also some real downsides that should not be overlooked. Most notably, the boost in status that comes with being named an equity partner is paired with a sizable financial hit in the form of a required capital contribution. This contribution is typically in the range of 25 to 35 percent of annual compensation, but at some firms it can amount to 50 percent or more. Regardless, it’s a lot of money to fork over to the firm, especially for lawyers who are still relatively early in their careers. And getting the capital contribution back may not be so simple. Under the rules of many partnership agreements, the firm is not obligated to return the money until years after an equity partner’s exit. Less significant, but still worth noting: equity partners must pay for their own benefits. 

Another factor to consider is that equity partners’ voting rights are diminishing at many firms. Historically, a wide range of decisions—ranging from lateral partnership hires to office lease renewals—required a vote of the full equity partnership. As the size and geographic spread of partnerships has expanded, many firms have determined that it is more practical to delegate most decisions to a small committee or even to the sole discretion of the firm’s Chair. From an efficiency perspective, this is largely a positive development, but one side effect is reduced influence for equity partners who are not in top leadership posts. With respect to an increasingly broad set of issues, these partners are treated more like employees than owners.

When is non-equity best?

Weighing the benefits and downsides, non-equity partnership looks relatively appealing in some scenarios. The opportunity to avoid a substantial capital contribution can be a selling point to both the youngest and oldest partners. At the younger end, partners may not yet have built up enough of an investment portfolio to feel comfortable allocating such a large sum to an illiquid investment in the firm.

At the senior end of the spectrum, a departing equity partner who is contemplating one more short stint at another firm before retirement may be attracted to the simplicity of a non-equity arrangement. Partners in this situation have nothing to prove by again becoming equity partners. They may instead place more value on gaining the flexibility to invest in other ways the capital contribution that their prior firm will return to them. The opportunity to avoid assuming liability for the new firm’s debts is another benefit.

For partners in certain niche practices that do not entail a large standalone book of business, non-equity partnership can also make more sense. Practices such as Tax and Trusts & Estates often function as service providers to other practices in the firm, such that the firm’s origination credit formulas may not greatly reward the partners who specialize in these niche areas. A non-equity partnership arrangement that properly values these partners’ contributions may be the right answer.

A compromise approach: from non-equity to equity

For many partners, the best approach may be to split the difference by pursuing non-equity partnership opportunities that are likely to lead to equity partnership later. This enables the partner to delay the capital contribution hit, while preserving the opportunity to capitalize fully on client relationships as the partner’s book of business expands. Obviously, a partner hoping to go this route must first assess whether the firm offers a real and viable track from non-equity to equity. Where this pathway really does exist, it can offer the best of both worlds.

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Evolving Partnership Economics: The Equity and Non-Equity Models Are Starting to Blur

The “partner” title holds undeniable cachet in law firms. Elevation to the partnership is treated as a key professional milestone. But in the current law firm landscape, the fact that a lawyer has been designated a partner often conveys very little about the economic arrangement between that lawyer and the firm. A few firms have a single tier of partnership, but the majority have at least two. In some firms there are as many as four tiers, each with a different set of benefits and obligations.

The traditional equity model

In simpler times, partnership meant equity partnership. If you made partner, you received an ownership interest in your firm and the right to vote on firm governance matters. In exchange for that equity interest, you were required upon joining the partnership to contribute a lump sum of capital. The firm held onto your contribution for the duration of your partnership tenure, and upon your retirement from the partnership, you sold your interest back to the firm and reclaimed your capital. As for annual compensation, longer tenured partners typically took home a larger slice of the pie than the newly elevated, but no partner was paid a fixed salary. As the general fortunes of the firm rose or fell, all members of the partnership rode the wave together.

At a few major law firms the traditional model remains largely intact. Firms like Cravath and Debevoise are the purest examples: they continue to have only equity partners and to pay lockstep, seniority-based partner compensation. Firms such as Davis Polk have done away with lockstep compensation but still feature an all-equity partnership. However, firms committed to awarding equity to every partner comprise a shrinking minority of the legal industry.

The non-equity alternative

As early as the 1970s, some law firms began to introduce a bifurcated partnership model: there were equity partners and non-equity partners (sometimes described as income partners or non-share partners). Non-equity partners did not become owners of the firm, did not have full voting rights, and were not expected to contribute capital. Instead, they effectively were paid a salary. Becoming a non-equity partner meant you received the “partner” title but not the partner economics.

In some firms, the non-equity partnership tier was pitched as a stepping stone to equity partnership. The intermediate non-equity tier was a conceit designed to lengthen the track to true partnership while providing some social capital in the interim. It enabled lawyers who were effectively still senior associates, as traditionally defined, to market themselves externally as “partners.” Delaying the elevation of some senior associates to equity partnership by a couple of years may have been helpful for firm economics in the short term, but there is always the next generation of associates rising through the ranks. So the notion of non-equity partnership as simply a way station on the track to the equity tier was never especially credible, and before long, non-equity partnership became a common terminal status for many lawyers.

Blending equity and non-equity

The distinction between equity and non-equity partnership has become increasingly blurred at many firms. For example, several firms in the Am Law 100 now require non-equity partners to contribute capital. This is sometimes sold as a means of giving non-equity partners “skin in the firm game.” But in a world where only a small proportion of non-equity partners are likely to ascend to the equity ranks, one can understand why non-equity partners would be unenthusiastic about the capital contribution trend. They are being required to bear a burden of equity partnership with no guarantee of receiving the corresponding benefit.

Some firms are creating multiple partnership tiers (sometimes called compensation bands), with each tier featuring its own combination of rights and obligations that may not neatly correspond to either the equity or non-equity models. Perkins Coie has four tiers. The lowest tier is similar to the standard non-equity model, in that partners in that tier are paid a straight salary. The higher tiers are differentiated both in the level of compensation offered and in the voting rights afforded to the partners in the tier.

As the economic models of partnership have grown increasingly complex and differentiated, so have the implications for current and potential partners. In our next installment, we will explain how non-equity partnership can be a superior option for lawyers in certain scenarios.

Featured, In-House Market, Partner Market

Who Is Better Compensated: Elite Biglaw Partners Or Top General Counsel?

If you’ve paid any attention to the ballooning compensation figures of Biglaw partners in recent years, you already know that it pays to be an equity partner at a large firm. Meanwhile, as average partner compensation escalates, top in-house lawyers are being left behind.   

In 2020, a Major Lindsey & Africa survey of partners in “Am Law 200 size firms” found average compensation of above $1 million. The ALM Intelligence 2020 Law Department Compensation Benchmarking Survey found general counsel and chief legal officers earned average total compensation of $573,000. So, as a general rule, it’s more lucrative to be a Biglaw partner than a general counsel.

But what about at the very top end of the profession? In this article, we take a look at the pay packages of the top 100 highest-paid general counsels, in comparison to partners of top Biglaw firms (as measured by profits per equity partner). We find that on a cash compensation basis, equity partnership is more lucrative than being a general counsel. But the story is more complicated when taking stock options into account.

A quick note on sources. For general counsel compensation data, we look at the top 100 highest-paid GCs as listed in the 2020 ALM Intelligence GC Compensation Survey. This data set is not comprehensive. For one thing, ALM compiles its data from proxy statements filed with the SEC, so only public companies are included. Our source for Biglaw partner compensation is the 2020 edition of the Am Law 200 ranking.

It’s hard to outearn a top Biglaw partner

The General Counsel Compensation Survey ranks general counsels based on total cash compensation. The top 100 highest-paid GCs earned total cash compensation of $2.42 million on average. We don’t know how much the 100 best-paid Biglaw partners earned in the comparable period, but we can say that the top firm in the Am Law ranking — Wachtell — had 85 equity partners and profits per partner of $6.33 million.

Just two general counsels took home cash compensation higher than $6.33 million: Alan Braverman of Disney ($8 million) and Eric Grossman of Morgan Stanley ($6.94 million). Meanwhile, 38 Am Law firms had profits per equity partner in excess of the $2.42 million average general counsel cash compensation.

How does this compare to the situation a decade earlier? Analyzing the 2010 editions of the same surveys, we find that not much has changed. Based on the 2010 General Counsel Compensation Survey, the top 100 general counsels took home average total cash compensation of $1.56 million. Wachtell’s profits per partner were $4.3 million, a figure exceeded by just one general counsel. 28 Am Law firms had higher profits per equity partner than the $1.56 million general counsel average.

What about compensation growth over that ten-year period? From a growth perspective, who did better: the top 100 general counsels or the partnership of the top Am Law firms? The table below shows the results, ranked by growth rate. The law firms in the table were the top 10 firms in the 2010 Am Law 200. We see that general counsels fall in the middle of the pack, outpacing some partnerships and trailing others.

Group (equity partnership or GCs)10-year compensation growth
Kirkland & Ellis108%
Simpson Thacher83%
Paul, Weiss75%
Cravath63%
Sullivan & Cromwell57%
Top 100 GCs55%
Cahill Gordon51%
Wachtell47%
Quinn Emanuel46%
Boies, Schiller17%
Irell & Manella8%

But stock options can make a big difference

The comparisons above obscure some important factors. On the in-house side, it is critical to note that the very highest-earning general counsels receive a substantial portion of their compensation in the form of equity. Taking stock options into account, some general counsel roles start to look considerably more attractive. For example, revisiting the 2020 surveys, when accounting for equity compensation, the number of general counsels topping Wachtell’s profits per partner rises from two to 41. And some of the general counsels have total compensation that would exceed that of even the highest-paid Biglaw rainmaker. For example, Chewy GC Susan Helfrick had total compensation of $30.3 million (of which less than $1 million was in cash). Apple GC Kate Adams had cash compensation of $3.56 million, but her total compensation was $25.2 million.

On the law firm side, profits per equity partner gives little indication of the rewards that flow to top rainmakers. Firms vary widely in their compensation ranges. At the most traditional end of the spectrum, a firm’s highest-paid partner might take home 4x the pay of the lowest-paid partner. In contrast, at a firm with a strong eat-what-you-kill culture, that ratio may be 10x or higher. A 2018 New York Times article about the lateral talent wars reported on eight-figure pay packages for star hires at firms like Kirkland & Ellis and Paul, Weiss. It’s impossible to know how many Biglaw attorneys have breached $10 million, but the lateral market for partners with a strong book of business remains red hot.

Conclusion

There are a lot of reasons why an attorney might prefer to be a general counsel than a law firm partner. But viewed strictly through the lens of compensation, high-performing lawyers are typically better off staying on the law firm track. Of course, that doesn’t necessarily mean they should stick with their current firm. With Biglaw partnerships increasingly diverging in their approaches to compensation, it’s a mistake to assume that a partner with a given book of business will be paid similarly at any comparably prestigious firm. Productive partners have a variety of options — and it pays to know about them.

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A Deep Dive Into The 2021 Am Law 100 Rankings

Last year was a difficult year for so many industries but a shockingly good one for Biglaw, at least in terms of metrics like gross revenue, revenue per lawyer, and profits per partner.

“Lawyers are terrible businesspeople.” You’ve surely heard this before. But is it true?

If lawyers are so bad at business, then why did the Am Law 100, the nation’s 100 largest law firms ranked by revenue, have such a banner year in 2020? In the midst of a global pandemic and economic downturn — one that hammered so many industries, from airlines to hospitality to commercial real estate– Biglaw firms flourished.

Last week, the American Lawyer issued its eagerly anticipated Am Law 100 rankings for 2021. As a group, here’s how the Am Law 100 fared in 2020 (as noted by Dan Packel in his excellent analysis of the data):

  • Total revenue: $111 billion, up by 6.6 percent.
  • Average revenue per lawyer: $1.05 million, up by 5 percent.
  • Profits per equity partner: $2.23 million, up by 13.4 percent.

Who are you calling a terrible businessperson now? These growth rates exceeded those posted by the Am Law 100 in the far more normal year of 2019 (which were 5 percent, 3 percent, and 5 percent, respectively, for total revenue, RPL, and PPEP).

What drove the dramatic increase in profitability? Yes, cost-cutting did play a role; firms used the pandemic as an opportunity to make themselves more efficient, eliminating or reducing various expenses that they were already planning to cut (e.g., certain administrative roles, real estate costs, etc.).

But, at least collectively, the Am Law 100 didn’t juice their profits by slashing lawyer or even equity-partner headcount. Total attorney headcount actually grew slightly, rising by 1.7 percent to 105,718, and the number of equity partners remained flat (down by just 12 partners, to a new total of 21,258).

Let’s now take a closer look at the three key metrics — gross revenue, revenue per lawyer, and profits per partner — and the top 10 firms in each category.

Gross Revenue

Here are the top 10 firms in the 2021 Am Law 100 rankings, ranked by their gross revenue in 2020. You can access the full list here.

Kudos to Kirkland & Ellis and Latham & Watkins, once again the two top-grossing firms, which both grew their total revenue by double digits. All of the other top-ten firms also increased their revenue, except for Baker McKenzie, which saw a slight dip (perhaps due to the global nature of the firm; the U.S. legal market generally performed better than overseas markets last year).

As you can see, there wasn’t much change in terms of the rank order of the firms. Everyone kept their 2020 spots except for White & Case and Hogan Lovells, who swapped places; now White & Case is #8 and Hogan Lovells is #9.

In 2020, 42 firms enjoyed gross revenue in excess of $1 billion, one more than the 41 firms in 2019. Almost three-quarters of the Am Law 100 — 74 firms, to be precise — grew their gross revenue. On the strength of its capital markets practice, Davis Polk had the biggest gain, a whopping 22.6 percent. (For more on how Davis Polk pulled off such a great financial performance, see this Bloomberg Law piece by Roy Strom.)

Revenue Per Lawyer

Here are the top 10 firms in the 2021 Am Law rankings based on revenue per lawyer. You can access the full list here.

As you can see, revenue per lawyer grew quite nicely among the top ten, with four firms posting double-digit growth. Once again, Wachtell Lipton and Sullivan & Cromwell took the top two spots — but Davis Polk zoomed up from #10 to #3. Two other firms known for strong capital markets practices, Cahill Gordon and Debevoise & Plimpton, also posted strong gains, breaking into the top 10.

Profits Per Equity Partner

And now, everyone’s favorite ranking: the top 10 firms by profits per equity partner. You can access the full list here.

As usual, Wachtell Lipton took the #1 spot, with an incredible $7.5 million in PPEP. But Kirkland & Ellis, in recent years the #2 firm, got bumped out of second place by Davis Polk, with $6.35 million. If 2021 turns out to be like 2020, it’s conceivable that Davis Polk could displace Wachtell as #1 in next year’s rankings (but based on the strong year that M&A is having so far, I wouldn’t necessarily count on that). As for the rest of the top ten, there wasn’t that much movement, except for the ascension of Cahill and Debevoise (which the revenue per lawyer rankings hinted at).

Taken collectively, the Am Law 100 performed well in terms of profitability. As the American Lawyer reports, average PPEP increased by 13 percent in 2020, and 56 firms enjoyed growth rates of at least 10 percent, compared to just 23 in last year’s rankings. So congratulations to Biglaw on its big success in 2020 — a year that was, to put it mildly, extremely challenging for so many of us.

Moving on from the rankings, I’d like to close with a personal announcement. As mentioned in passing in this New York Times piece by media columnist Ben Smith, I’m returning to full-time writing as of next week. I’ve enjoyed recruiting, but one thing I’ve learned about myself over this crazy past year, including my near-death experience with Covid-19, is that writing is what I truly love.

Back in December, I launched a new publication about legal affairs called Original Jurisdiction. I started off doing it for fun on the side, but I’ve realized after five months or so that I want to do it full-time and try to make a living out of it.

Original Jurisdiction comes out as both a newsletter and a blog; please feel free to sign up if interested. Right now it’s free, as it has been for the past five months. Next week, I will add paid subscriptions — which is how writers on the Substack platform earn a living — but there will always be lots of free content.

I have greatly enjoyed my two years at Lateral Link, in large part because of my amazing colleagues, and I wouldn’t have wanted to work at any other recruiting firm. I don’t think there’s another legal search firm out there that has such talented recruiters and does such an excellent job of encouraging and incentivizing them to work together as a team.

If you’re interested in working with Lateral Link as either a law firm or a candidate, please feel free to reach out to me. Although I’m finishing up my work here, I’d be happy to connect you with an appropriate colleague.  Thank you, and please do stay in touch!