A report by Legal affiliate The American Lawyer shows Pennsylvania firms to be largely in the middle of the pack when it comes to nonequity partner compensation, but research by The Legal shows that growing nonequity partnership tiers at many of those firms led to lower payouts per nonequity partner (PNEP) between 2010 and 2011.
While PNEP ranged from $100,000 per partner at the low end of the Am Law 200 to $1.5 million at the high end of the Am Law 100, most firms across the state fell within the midrange — between $250,000 and $370,000.
Only a few Pennsylvania firms — namely Dechert and Morgan Lewis & Bockius — had higher nonequity partner pay.
Likewise, while a handful of Pennsylvania firms’ PNEP equaled more than half of their profits per equity partner (PPP), most firms hovered near but below the 50 percent mark, regardless of their ratios of nonequity to equity partners.
A few other firms across the state paid their nonequity partners significantly less than half of what their equity partners made in 2011.
One thing many of the Pennsylvania firms on the Am Law 100 and Am Law 200 had in common in 2011 was a larger nonequity partner tier.
According to The American Lawyer, the upward trend has continued nationwide over the past decade, with nonequity partners accounting for an average of 45 percent of the partnership among the 168 firms that reported them in 2011, up from just 31 percent among the 150 firms that had reported them in 2001.
But by applying the same mathematical formula used by The American Lawyer — dividing each firm’s total nonequity partner payout by the number of nonequity partners — The Legal found that several firms, including Drinker Biddle & Reath, Pepper Hamilton, Blank Rome and Saul Ewing, saw increases in their nonequity partner ranks in 2011 and decreases in their PNEP from the previous year.
Still, according to The American Lawyer, nonequity partners’ collective pay nationwide has grown overall from about $2.1 billion in 2001 to $7.4 billion in 2011.
New York-based recruiter Jerry Kowalski told The Legal on Monday that he’s definitely seen large firms trending toward a greater emphasis on nonequity partners and he doesn’t necessarily view that as a good thing.
Kowalski said the concept of the nonequity partner was born out of increased competition among large law firms to have the highest PPP (which he said was spurred on at least in part by the Am Law 100and Am Law 200surveys).
“It created this whole new category that has continued to expand over the years,” Kowalski said, adding that the recent recession accelerated that expansion.
As a result, Kowalski said, law firms’ leverage models have shifted so that where associates may have historically handled the bulk of the work while equity partners received the bulk of the profits, nonequity partners have now taken on a greater portion of the workload.
That’s particularly true now that economic conditions have made many clients more reluctant to pay top dollar for work performed by first- and second-year associates, according to Kowalski.
But while conventional wisdom might say that nonequity partners trade lower pay and more work for much less risk than what is incurred by equity partners, Kowalski said that’s not necessarily true, citing the recent downfall of New York-based Dewey & LeBoeuf as an example.
“The risk is that when a firm goes belly up like we saw with Dewey … the nonequity guys paid up also,” Kowalski said. “It’s a little bit of sort of bankruptcy magic, but they do pay. You have the same risk, but you’ve got no upside.”
In addition, Kowalski said some firms do require nonequity partners to put up capital.
“You’re essentially obligated to pay for your job,” Kowalski said.
But Haverford, Pa.-based legal consultant Frank D’Amore said the definition of “nonequity partner” varies too widely from firm to firm to make any broad generalizations about the upsides and downsides.
In some firms, for example, nonequity partners may be permitted to attend all of the same partnership meetings as equity partners, D’Amore said.
And while nonequity partners at those firms may technically have different voting rights than equity partners, a number of firms are consensus-driven now anyway, D’Amore said.
In other firms, D’Amore added, nonequity partners may be asked to inject capital into the firm, but may then be entitled to receive that capital back with interest or to share in some of the firm’s profits via a separate bonus pool.
Even in those firms where nonequity partners do not technically share in the profits the way equity partners do, there are opportunities to make significant money, D’Amore said.
“A lot of firms give nonequities a bonus,” D’Amore said. “If somebody just had a terrific year, it’s entirely conceivable a nonequity will do better than an equity.”
The real risk for nonequity partners, according to D’Amore, is that they may not enjoy the same job security at their firms that equity partners do.
Regardless, D’Amore said, equity partners are becoming an increasingly rare breed at many large firms.
“The reality is, the trend is clearly continuing that the percentage of people who are equity partners at firms is declining,” he said. “It’s becoming harder and harder, particularly at big firms, to become an equity partner.”
Philadelphia-based Dechert, whose 105-lawyer nonequity tier accounted for about 42.7 percent of its total partnership, paid each of its nonequity partners $605,000 on average in 2011.
However, that number equaled only about 29 percent of the $2.1 million the firm paid to each of its 141 equity partners.
Philadelphia-based Morgan Lewis, meanwhile, paid its 212 nonequity partners, who make up about 46.2 percent of its total partnership, $570,000 each in 2011.
Morgan Lewis’ PNEP was about 38 percent of its PPP of $1.5 million, paid to each of its 247 equity partners.
The next closest Pennsylvania firm, however, was Pittsburgh-based Reed Smith, which paid its 392 nonequity partners an average of $370,000 each in 2011.
The firm’s nonequity partner tier accounted for about 55 percent of the firm’s total partners in 2011 and its PNEP figure was about 36.3 percent of the nearly $1 million each of its 313 equity partners received.
Just below Reed Smith, Philadelphia-based Drinker Biddle paid its 76 nonequity partners an average of $365,000 each, which amounted to 51.4 percent of the firm’s PPP of $710,000 for each of its 186 equity partners.
In 2010, the firm paid its roughly 71 nonequity partners an average of $400,000 each.
Philadelphia-based Duane Morris paid each of its 219 nonequity partners about $355,000, which was 41.3 percent of the $860,000 it paid out to each of its 137 equity partners.
Pepper Hamilton in Philadelphia also paid each of its 60 nonequity partners about $355,000, though that number was about 46.4 percent of its PPP, which was $765,000 for each of its 158 equity partners.
In 2010, the firm paid its 55 nonequity partners about $358,000 each.
Pittsburgh-based Buchanan Ingersoll & Rooney’s 89 nonequity partners each received about $350,000 in 2011, which was about 50.4 percent of the $695,000 its 103 partners each received.
K&L Gates in Pittsburgh paid its 643 nonequity partners, who accounted for nearly 71 percent of the firm’s partners in 2011, an average of $345,000 each.
That figure was equal to 38.8 percent of the $890,000 the firm paid to each of its 264 equity partners.
Reading, Pa.-based Stevens & Lee also paid its 53 nonequity partners, who made up 48.6 percent of the firm’s total partnership, about $345,000 each, or 34 percent of the roughly $1 million each of the firm’s 56 equity partners received in 2011.
Philadelphia-based Blank Rome paid $310,000 to each of its 121 nonequity partners in 2011, which was about 48 percent of the $650,000 it paid to each of its 139 equity partners.
The firm had paid about $324,000 to each of its 111 nonequity partners in 2010.Cozen O’Connor in Philadelphia paid its 100 nonequity partners $295,000 each, or about 45 percent of the $655,000 it paid to each of its 146 equity partners.
Cozen O’Connor was the rare firm that saw its nonequity partnership tier plummet — by 16.7 percent — in 2011.
Philadelphia-based Saul Ewing paid its 49 nonequity partners $290,000 each, or about 58 percent of the $500,000 it paid to each of its 83 equity partners.
The firm had paid about $310,000 to each of its 48 nonequity partners in 2010.
Fox Rothschild, also in Philadelphia, had the lowest PNEP of the Pennsylvania firms on the Am Law 200, paying $250,000 to each of its 59 nonequity partners in 2011, which equaled about 42.7 percent of the $585,000 it paid to each of its 150 equity partners.
Like Cozen O’Connor, Fox Rothschild’s nonequity partnership tier dropped sharply — about 21.3 percent — in 2011.