The unstoppable rise of non-equity partners

Making partner has long been the ambition of young lawyers: it marks the culmination of years of very hard work. But many big firms are redefining what it means to be a full equity partner as non-equity partners continue to proliferate. Paid a salary rather than taking a share in firm profits via an equity stake, they are increasingly common. According to the latest AM Law data, 85 percent of the largest 100 firms by revenue now have non-equity tiers – up from 27 percent a generation ago. Over the past three years, 70 of the top 100 have increased their non-equity tier in size, or just started to appoint non-equity partners.

In October, Cleary Gottlieb Steen & Hamilton became the latest to announce that it was opening up the non-equity route to partnership because, according to the firm’s statement, it “underscores our dedication to developing and retaining talent.” Among other leading firms that previously rejected the idea of appointing non-equity partners, Cravath made a similar move in November 2023, followed shortly afterwards by Paul Weiss.     

Benefits of two-tier approach

So, what is fuelling the surge in adopting and expanding the two-tier partnership structure, and who benefits? Adopting the two-tier approach is beneficial for several reasons: it allows equity partners to retain top talent without diluting equity share, it preserves the profits per equity partner (PEP) figures, and with the addition of a non-equity tier in particular, it increases leverage - the ratio of equity partners to total fee earners. Its primary use is to try and keep individual lawyers of talent who have been with the firm for a long time, when there is not yet a business case to make them equity partner. 

Kirkland & Ellis, the largest US law firm by revenue has been both a trailblazer and a driver of change: nearly two-thirds of its 950 partners are non-equity. But this structural shift has evolved gradually over more than twenty years. For more recent converts to the idea, the rationale is perhaps more immediate. Paul Weiss chair Brad Karp has indicated that it was “to address head-on the competitive realities of the current marketplace.” In other words, it is straightforward commercial logic.  

The introduction of non-equity partnership structures certainly enables firms to retain talent without having to commit to expanding the equity partnership and potentially diluting the PEP top line. Rightly or wrongly, the latter is one of the most common benchmarks by which the largest US and UK law firms are measured against each other. It also provides lawyers with the opportunity to have the partner title as a stepping-stone towards full equity, together with a commensurate increase in salary, market profile and career progression.

In a fluid and dynamic recruitment market, where the phrase ‘battle for talent’ remains ubiquitous, keeping that talent is essential. Arguably, it is biggest single causal factor in the recent upward spike in the adoption of the non-equity partnership tier.