You could call it the last black box. For more than three decades, The American Lawyer has ranked profits per partner at Am Law 200 firms. Parsing and comparing those equity partner paychecks has become routine sport among law firm leaders, consultants, and recruiters. Associate compensation is put under the same microscope—salaries and bonuses appear on news sites and blogs minutes after their announcement or distribution. But compensation for nonequity partners, the fastest-growing cohort in The Am Law 200, has remained largely opaque. Until now.
How much do nonequity partners get paid? For the first time we decided to apply some simple math to our most recent Am Law 200 financial survey data to find out. Our methodology was straightforward: Just as we derive a firm’s profits per partner from its net income (we divide that amount by the number of equity partners), we used each firm’s reported nonequity compensation, divided by its total number of nonequity partners, to calculate an average payout per nonequity partner, or PNEP. The range in PNEP results was startling, going from $1.53 million at the high end (Milbank, Tweed, Hadley & McCloy) to $100,000 at the bottom (Vorys, Sater, Seymour and Pease) [see "How the Other Half Lives,"]. What’s more, the relationship between what firms paid their nonequity partners (PNEP) and what they paid their equity partners (PPP) was all over the place, with PNEP spanning from less than a fifth of a firm’s PPP to a number that’s only a bit below it (at Wiley Rein, for example).
To make sense of those numbers, we turned to a group of 19 senior partners and law firm leaders. Given the sensitive nature of compensation, many preferred to speak on background. But those conversations, along with discussions with recruiters and consultants, painted a picture of a nonequity partner population that’s becoming more and more of a mishmash.
There are a half-dozen different names for this cohort—income partners, salary partners, nonshare partners, fixed-dollar partners, contract partners—and the types of lawyers that carry these titles are just as varied. They can include ambitious junior partners on the path to equity partnership, laterals with a short-term fixed-compensation arrangement, senior partners on their way to retirement, partners seeking a predictable income or better lifestyle, or at many firms, some combination of all of the above. Making matters even more complex, The American Lawyer ‘s definition of nonequity—any partner earning more than half of his or her compensation on a fixed basis—doesn’t always match firms’ internal classifications. Given such diverse and amorphous definitions, it’s no surprise that a multitude of different compensation systems and pay scales have proliferated for this group of lawyers.
The numbers and dollars matter. Over the last decade, nonequity partners have swelled to an average of 45 percent of the partnership among the 168 firms that report them, and these partners earned a collective $7.4 billion in 2011. (In 2001 this average percentage was just 31 percent among the 150 firms that reported nonequity partners, and these lawyers earned a reported total of $2.1 billion.) That money is certainly not divided equally. And the specific definitions, rights, and responsibilities that each firm uses can make a big difference as to which end of the compensation scale nonequity partners fall.
“The big question really is ‘What is nonequity these days?’ ” says Jeffrey Lowe, global practice leader of the law firm practice at Major, Lindsey & Africa and the author of the recruiting firm’s most recent partner compensation survey. “In the old days, it was easy, either you were a full partner or not. Now things are blending, and it’s difficult to say what the right definition is. The world has changed a lot, and not every firm is separating partners in the same way,” he says.
Toward the bottom of the pay scale are the junior partners who progress through the nonequity ranks on the path to partnership. Of all the categories of nonequity partner, the junior partner ranks, or “stepping-stone” contingent, has anecdotally grown the most in recent years as firms have lengthened the track and increased the hurdles for full equity partnership.
There are two versions. The first considers the junior nonequity partner as an employee, and is best exemplified by Kirkland & Ellis. The firm, which has long been known for its two-tier model, requires all upcoming associates to spend time as “nonshare” partners before they are considered for equity partnership, according to Kirkland. Associates are eligible for nonshare status after six years, says the firm. These nonshare partners then have about about three to four years to win an election to the equity partnership, and the model is absolutely “up-or-out,” says Lippman Jungers recruiter Mark Jungers, who has placed former Kirkland partners. (Kirkland declined to comment on the timeline for equity partnership.)
Kirkland’s roughly 360 nonshare partners represent just over half of the total partnership, but these individuals aren’t compensated much differently from senior associates: They are paid with a fixed salary and bonus, according to the firm. And their average compensation reflects a stark divide with the firm’s equity partnership. Kirkland’s PNEP was $455,000 in 2011, a sum that represents only 14.9 percent of the firm’s PPP, the lowest relative ratio of PNEP to PPP in The Am Law 200.
To a lesser extent, firms like Akin Gump Strauss Hauer & Feld follow a similar model. Associates are eligible for “income partner” status after eight-and-a-half years, and even then they are employees, paid only a salary and bonus based on individual, not firm, performance, says chairman R. Bruce McLean. He estimates that approximately 105 of the firm’s reported 136 nonequity partners fall into this category, and compensation for these junior partners is, on average, between $450,000 and $500,000. (That average, which would represent between 27 and 30 percent of the firm’s PPP, is lower than our calculated PNEP of $660,000, mostly because of higher compensation to certain laterals and older partners who may be reported as nonequity partners.)
The second type of junior nonequity partner is more of a hybrid. Exemplified by Paul Hastings and several New York–based firms, these junior partners are considered full equity partners by their firms, with the same rights to vote and requirements to contribute capital. While their compensation is largely fixed, for anywhere between one and four years, it’s still quite generous. Paychecks for these ascending partners can range from $650,000 to $1 million in the major markets, according to law firm leaders and recruiters.
“The fixed compensation allows a level of planning for our younger partners who haven’t yet had the benefit of a big [end-of-year] paycheck,” says Greg Nitzkowski, Paul Hastings’s managing partner. His firm uses fixed compensation for the first two years after a lawyer has been elected to the partnership. “I’m one tier below the top [compensation level], but I don’t want to forget what it was like to be a 40-year-old partner struggling to pay a mortgage or afford my kids’ tuition. We’ve tried to make those things easier for our younger partners,” Nitzkowski says.
At other firms, a junior partner’s steps toward a piece of firm profits are even more graduated. Perkins Coie has five tiers of partnership. The bottom two are considered nonequity, with partners in those groups receiving a fixed salary, says managing partner Robert Giles. But all partners vote, and all are eligible for a bonus (the firm’s bonus pool is a quarter to a third of firm profits in any given year), a potentially sizable sum that can blur the lines between equity and nonequity status, says Giles. Partners begin making capital contributions once they graduate into the second tier, which has a nonequity partner compensation range between $350,000 and $450,000 for offices in big cities. A two-thirds majority vote by the firm’s compensation committee is required to elevate a partner into tier 3, or equity partner status. Partners in tier 3 can earn between $450,000 and $550,000, and from this point on, these lawyers are “totally in the mix”; there is no guaranteed base income, says Giles.
Partners climbing the ranks at DLA Piper have a progressively shifting mix of fixed and floating compensation. The firm, which has a PNEP of $415,000, eliminated its two-tier partnership with respect to partnership rights and requirements (in the United States in 2008 and globally in May 2012): All partners vote and contribute capital. But the fixed component of a partner’s compensation can range between 25 and 85 percent, depending on the partner’s location and stage of career, says cochairman J. Terence “Terry” O’Malley. “By the time you’re a partner for seven or eight years, most are not getting more than 50 percent of their compensation as a fixed draw,” he says. “But it’s really based on the [size] of your aggregate compensation; the higher the number, the less of it that’s fixed.”
Additionally, lateral hiring at Am Law 200 firms almost always skews the PNEP, and its ratio to PPP, higher. Though firms such as Paul Hastings immediately place all lateral partners in their share or point system, most firms offer arriving partners a base guarantee for anywhere between a few months and two or three years, according to recruiters and law firm leaders. These pay packages, which can be completely fixed or can include bonuses earned through benchmarks, almost always qualify the new lateral for nonequity status in the Am Law 200 survey by virtue of our 50 percent rule. And so any addition of senior lateral partners can add tens or even hundreds of thousands of dollars to a firm’s average nonequity payout in a given year, say law firm leaders.
In some cases, these well-paid laterals are considered equity partners at their new firms on day one, with full partnership and voting rights. Weil, Gotshal & Manges, for instance, hired 18 lateral partners into its equity ranks in 2011. And though the firm only pays guaranteed packages for the months remaining in the calendar year that the lateral joins, the sheer number of these fractional additions are enough to artificially raise Weil’s PNEP to $1.3 million, says executive partner Barry Wolf.
It’s not just the very top-end of the nonequity pay scale that succumbs to the lateral influence. Washington, D.C.–based Dickstein Shapiro has a PNEP of $540,000, 59 percent of the firm’s PPP. But chairman Michael Nannes says that average is 15–20 percent too high, because of well-compensated lateral partners in practice areas such as IP. The additions are equity partners under the firm’s definition, but Dickstein typically offers lateral partners a guaranteed pay package for the first one to two years, he says. Those laterals inflate the average nonequity payout, while also artificially deflating the firm’s PPP, Nannes says.
Other firms require even the most senior lateral hires to spend time as nonequity partners, a rule that can similarly boost the firm’s PNEP. These trial periods range between one and three years and ensure that laterals deliver on their promised book of business before they are voted into the partnership, say law firm leaders. “It’s one thing to make a mistake and just not renew a contract; it’s much harder to vote out an equity partner,” says Patton Boggs CFO William “Bill” Ryan.
And some firms say a short-term nonequity arrangement, even one with a lucrative base and bonus structure, can bridge any gaps between the pay expectations of the lateral and the firm’s willingness to shoulder the risk of an unpredictable practice. Haynes and Boone has lateral nonequity partners that earn between $500,000 and $600,000, says managing partner Terry Conner, a range significantly above the firm’s PNEP of $415,000. Those high-earning nonequity partners are usually individuals with practices that depend on a smaller number of major matters, or those with a strong track record but a recent difficult stretch, says Conner. Since the firm’s capital requirements are significant, and equity partners are ineligible for bonuses, the flexibility of a nonequity pay package and performance bonus is sometimes a “better fit,” according to Conner.
Our calculated numbers may, in some cases, even understate the influence of lateral hires on the average payouts to nonequity partners. Cadwalader, Wickersham & Taft has a PNEP of $675,000, or 28 percent of the firm’s PPP, according to our 2011 Am Law survey. But Cadwalader spokesperson Adam Segall says the average among the partners reported as nonequity (because of their fixed compensation structure) was just over $1 million in 2011—a number that was boosted by the addition of 14 lateral partners that year. (For internal purposes the firm has only one tier of partnership.) Segall says that higher average includes all bonuses and payments made to laterals in 2011. Cadwalader attributes the difference between our calculated PNEP and the firm’s $1 million average to an accounting difference: The firm’s reported total “nonequity compensation” of $31 million doesn’t fully include all of these bonuses and payments to laterals because “Cadwalader classifies a portion of lateral compensation as a capital investment,” Segall says.
A far smaller subset of well-compensated nonequity ranks at some firms are the elder statesmen. In the twilight of their careers, these partners may be either approaching mandatory retirement, looking to reduce their workload, or simply happy to hand over the reins of equity partnership in exchange for a regular paycheck and the return of their capital. That paycheck can be quite steep. Patterson Belknap Webb & Tyler has three nonequity partners who earned a combined $4 million in 2011, an average of $1.3 million each, and 82 percent of its PPP. “Those partners are in a two-year transition to retirement, during which their income is fixed by a formula,” said cochair and managing partner Robert LoBue in an email. Similarly, Holland & Hart has two nonequity partners earning an average of $390,000 each, almost 87 percent of the firm’s PPP. These partners still vote, hold capital in the firm, and have the same rights and liabilities as all equity partners, says managing partner Thomas O’Donnell. But the partnership agreement requires the firm to pay all partners above a certain age through fixed arrangements instead of unit shares, he says.
And then there are the partners who embrace nonequity status on a more permanent basis, often for a better lifestyle or just the possibility of escaping the politics of equity partnership. “There are more and more people who prefer to have more of a work/life balance and are less inclined to take on the requirements of client development and a 24/7 career,” says Quarles & Brady managing partner Fredrick Lautz. Though this group still represents a relatively small number of the firm’s current roster of 58 income partners, he expects it to grow. (Quarles reported a total of 78 nonequity partners in 2011, a number that also includes lateral “contract partners.”)
For some, law firm failures, such as Thelen, Howrey, and most recently, Dewey & LeBoeuf, have proven that nonequity partnership can entail the best of all worlds—a healthy paycheck without the capital requirements or perceived risks of entering into a partnership with a group of several hundred lawyers whom you might not even know by name. “As a partner, you can’t control a firm’s risk. Just look at Dewey,” says one nonequity partner at a New York firm.
And expanding the population of nonequity partners, or the dollars going to them, might not be a bad thing. Law firms may just be moving toward the business model dominant in many other professions, with few owners and workers compensated on the basis of their contribution, says law firm consultant Joel Henning. “Think about what Derek Jeter or A-Rod makes—they’re not owners, but they’re making a market [compensation], or so their agents believe,” he says. “You want to pay people what they’re worth, but that doesn’t mean that they have the owner mentality.” At some firms that can mean a whole lot of money.