While nonequity partnership has transformed the former “up or out” construct at law firms, it is still primarily a bridge to full partnership rather than a final destination, according to a management consultant’s survey.

Nonequity partners – also known as “tier” or “income” partners – have been a growing breed of big-firm lawyer since the mid-1980s. Rather than draw against bottom-line profit, they are typically paid a healthy base salary plus incentives tied to personal and/or firm performance.

But the reasons for the hybrid status vary firm to firm and lawyer to lawyer, as does a tier partner’s relative rank. A tier partner can mean anything from a glorified associate to a general partner on the skids.

The ambiguities led Ed Wesemann, of Edge International in Savannah, Ga., to try to quantify the practice and the rationale.

He surveyed 58 managing partners of firms of more than 100 lawyers and found, at the median, these reasons for making lawyers tier partners:

� 18 percent of tier partners are lateral hires who have still to prove their mettle as rainmakers and performers.

� 45 percent of tier partners are associates who, after a pre-set period of time, are not quite ready for equity partnership but do meet objective performance criteria.

� 19 percent of tier partnerships are associates considered unlikely to make full partner.

� 4 percent of tier partners are equity partners who were demoted because they were underperforming.

� Respondents identified sundry other circumstances, such as equity partners making a transition to retirement and those on maternity or disability leave.

Most Tier Partners ‘On Path’

Wesemann says he set out to study nonequity partnership as a corrective measure for underachieving partners, which he says is one of the topics that comes up in meetings with law firms.

But while survey respondents said that about 15 percent of current equity partners don’t meet reasonable criteria for holding that position, it’s still a rarity to demote those lawyers to tier partners.

Instead, promotion to tier partnership is predominantly associates “on path” – that is, likely to progress to equity partner. Those tier partners outnumber “parked” tier partners – those not on a partnership track – by nearly 3 to 1, the survey finds.

The status “is becoming a routine part of the path to full partnership,” Weseman says. “You can view this as further gantlets [on the way to equity partnership] or you can view this as time they can learn to be lawyers. The truth is somewhere in between.”

Regardless of the reasons, more firms seem to be adopting tier partnership or, among those who already have it, adding more tier partners to the ranks.

The Edge survey found these results regarding firms’ incidence of making tier partners in the four listed categories over the past three years:

Laterals awaiting full partnership – 31 percent of managing partners said tier partnerships of this category had increased, 30 percent said there was little change, 13 percent reported a decrease and 28 percent said it was not applicable.

Associates awaiting full partnership – 25 percent of managing partners reported an increase, 35 percent said there was little change, 10 percent reported a decrease and 5 percent said not applicable.

Associates unlikely to achieve full partnership – 29 percent of managing partners reported an increase, 25 percent said there was little change, 8 percent reported a decrease and 37 percent said not applicable.

Demoted equity partners – 28 percent of managing partners reported an increase, 18 percent said there was little change, 3 percent reported a decrease, 51 percent said not applicable.

Pushing Up Profits Per Partner

Wesemann says there a number of good reasons for instituting tier partnership and some not-so-good ones.

One salutary effect is that it helps firms avoid the “up or out” problem, which is often the bane of senior associates skilled at their work but lacking in rainmaking talents. Tier partnership allows firms to keep these lawyers – and their institutional knowledge – at an affordable compensation rate.

For the tier partner, the pay and prestige are good, the pressure to bring in new business is less and there’s still the prospect of full partnership down the road. “If you’re being parked, you ain’t dead yet,” says Wesemann. “Wonderful things can happen to you.”

But making tier partners to avoid difficult personnel decisions is a practice that can lead to morale problems among senior associates. “As work comes down, they suck up the best and most challenging work,” Weseman says. “What comes down to the associates is leftovers.”

Another dubious reason for tier partnerships may have been spawned by published law firm economics surveys, such as those by The American Lawyer, which use profits per partner as a benchmark. The smaller the number of equity partners, the higher the PPP.

Dealing With Underperformers

The Edge survey also asked managing partners what attributes were most important in equity partners and got these results, in order of frequency:

� Having an “owner’s mentality” – that is, thinking like an equity partner.

� Being a top quality lawyer.

� Having enough business so support others.

� Having enough business to support oneself.

� Being a firm leader.

� Performance as a working attorney.

� Having a high profile.

But managing partners generally felt that only 85 percent of their firm’s current equity partners met those standards.

As for what to do to deal with the problem of underproductivity among equity partners, 93 percent of respondents said such partners should be coached and given opportunities to improve.

But, when asked if “retooling” underproducers into new practice areas is likely to succeed, a resounding 76 percent disagreed. And 69 percent disagreed with the notion that a firm should be willing to tolerate a partner working below the firm’s expectations.

About 66 percent of respondents said underproducers should have their pay cut.

Only 45 percent said that equity partners not up to snuff should be demoted to nonequity partners and fewer still – 34 percent – said that underproducers should be asked to leave the partnership.

Wesemann says he was surprised to learn that so few firms are demoting underperforming equity partners to nonequity status. “They view [a pay cut] as being less painful,” he says, though he points out, “Most firms don’t adjust it far enough to really make a difference.”