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.

Capturing and retaining talent 

Traditionally, many firms operated some form of ‘up or out’ policy. This gave way to longer tracks to partnership - the number of years it now takes to become partner at most major law firms has become longer and longer. It is therefore no surprise that the unpublished catalogue of senior associates, who have been lured away by offers of partnership at leading US and UK law firms, is extensive. Managing partners of those firms who have lost scores of talented individuals over time are well aware of the damage that it can cause, particularly to successful teams in profitable practice areas.   

Becoming a non-equity partner may not deliver the same level of reward as an equity partner, but it certainly elevates lawyers from being a senior associate, or of counsel. The salary, of course, will be higher. But so too will the status and self-esteem, as well as external perception by colleagues and friends – all are elevated by the addition of the word partner next to a lawyer’s name. The partner title not only adds to prestige, it also augments market visibility and respect from clients: opening doors, creating opportunities, and accelerating their career potential. In some firms, it means that the route to equity partnership remains open for those who consistently perform well. 

In commercial terms, being a partner invariably justifies higher charge out rates, sometimes much higher, which can add significantly to the firm’s revenue and profitability. Given the lack of transparency over which partners are equity and which are not, clients cannot usually differentiate between them. An enlarged number of partners also dovetails with many firms’ strategic objectives: partners grow their business, being more client facing, and doing more business development. Increasing market share is often paramount. 

Medium-term strategy

Inevitably, there is often a trade-off in play. Firms recognise that the offer of a non-equity partnership may not ultimately prevent talented lawyers from moving in the longer term. After all, lateral hiring in the legal market is now at a 17 year high. But adopt a medium-term strategy of retaining these lawyers for a few extra years as non-equity partners and they can bring more business onto the books for a longer period of time, increasing revenues, and developing more clients.

Two notes of caution. Despite the inexorable rise of non-equity partners, overuse of this tier can potentially result in a very ‘top heavy’ partnership group in some firms. Counterintuitively, this can create a drag on profitability, and may be off-putting for potential clients as a firm’s average charge out rate becomes too high to bear. It also creates an opaque structure in relation to DE&I: since equity partners are not readily identifiable, the opaque equity partnership structure may potentially disadvantage women, ethnic minorities and other underrepresented groups. Clearly, this is concerning when everyone expects greater transparency, not less. 

Notwithstanding these challenges, non-equity structures are set to become even more commonplace in native English-speaking firms, which are situated in more developed legal markets where the general lawyer headcount continues to increase year on year.