Law Firms Grapple With Nonequity Partner Pay ‘Friction’
By Andrew Maloney
Law firms are seeing complications in setting competitive pay for nonequity partners, as the number of so-called income partners rapidly grows.
Oftentimes, pay for nonequity partners can approach or overlap with compensation of senior associates, counsel as well as some equity partners, firm leaders and consultants say.
The increasingly blurry pay lines between the lawyer ranks are causing some conflicts. Law firms could lose some nonequity partner talent if firms don’t appear to be paying them more than senior associates, or if some nonequity partners are earning as much as equity partners but don't have the benefits that come along with equity ownership, observers say.
According to a recent ALM flash survey of Am Law 200 firms and midsize firms, nonequity partners averaged about $345,679 per year, with an average annual bonus of a little more than $106,000.
The survey, which took in responses from 286 lawyers total and about 56 nonequity partners specifically, also pegged the median salary for the non-equity tier right at $300,000, and the bonus at $50,000. The respondents in both groups ranged from the smallest firms (1-99 lawyers) to the largest (1,500+) scale.
In general, the nonequity tier in Big Law generally tops off in the high six-figures, depending on where you’re at in the Am Law rankings, said Dan Binstock, a Washington, D.C.-based recruiter for Garrison. “There’s such a wide range in variance, but generally we think of nonequity partners in the six figures or low seven figures, and anything above that tends to be more in the equity space,” he added in an interview.
Meanwhile, senior associates at big law firms last year were paid $435,000, plus a $115,000 bonus, totaling $575,000, as well as some firms giving out “special bonuses.” As associate salaries and bonuses grow, they are increasingly bumping up to nonequity partner pay.
“It definitely produces some friction,” noted Blane Prescott, managing shareholder at MesaFive who consults with firms on compensation. “Especially among middle market firms who are getting pulled up into the ranks of those firms paying set class bonuses and special bonuses. Many of these firms are now saying that they can no longer guarantee that [non-equity partners] will earn more than associates.”
The questions are also challenging for those firms with new nonequity tiers, with several Am Law 50 firms adding them in the last few years.
“I think it is getting more complicated because you also have a different class of firm now wrestling with, ‘How do we compensate our nonequity partners?’ that never had to think about it before,” said Jeff Lowe, senior managing partner and market president for Washington, D.C. at consulting firm CenterPeak.
“You’ve seen over the last five years, in particular formerly single-tier firms moving to a two-tier system, so they have to continue to find that line to keep the partners happy. But they went to two tiers specifically to divert more compensation to the equity partners. So, it can be very tricky.”
Mike Hammer, CEO of Am Law 200 firm Dickinson Wright, said his firm’s nonequity partner scale ranges from around $300,000 to about $900,000 annually, though there is “a lot of variability” in that tier, and the highest-paid nonequity partner might make closer to $1.5 million.
He said the numbers tend to move up or down the way equity partner pay does. So if the equity partners increase by about 10%, “income partners in our system might be going up 8%.” On the lower end of the pay scale, “we try to have the income partners start above the highest-paid associate,” Hammer said. “But if someone’s [an associate] just absolutely kicking butt, with super high numbers, and tons of money, there can definitely be overlap there.”
Equity and Income Partner Overlaps
Overlaps with equity partner pay are also common.
Betty Temple, chair emeritus at Womble Bond Dickinson, also said there can be some crossover between titles in her firm’s comp system. She described it as “bespoke,” one where nonequity partners make “generally, significantly more than associates, and sometimes, as much or more than equity partners.”
She also said their pay, like that of equity partners, depends on details like practice type, personal production, rates and whether the lawyer has developed and maintained a book of business, or leads a team: “All of those issues that go into equity partner compensation.”
With the path to partnership generally increasing in length, and more firms perhaps content to give out one-year bonuses instead of promotions to people doing good work, other firms are also noticing overlap in pay between lawyers in both the equity and nonequity tiers, “and it can be a real challenge,” Lowe said.
“Because for the people who are at the top of the nonequity scale, while it’s nice to be able to tell them they’re making more than some equity partners, it doesn’t necessarily make them that happy,” he said. “Because the key to being an equity partner are those years you beat budget and you end up with a kind of a bonus, without having to have done anything extra, because what you thought was going to be worth $1,000 a share is now $1,300 or $1,500 a share. There’s just a tremendous amount of money you can make as a consequence of being the equity partner.”
Prescott also said he thinks determining comp for nonequity partners is “definitely becoming a bigger job,” though not necessarily more complex.
“It is a common problem in some firms where they define, in advance of knowing any facts/all situations, that [non-equity partners] can never earn more than an equity partner. But it is not unusual to see an income/non-equity partner have one unusual, blowout year that is deserving of compensation that may be higher than a new/lower performing equity partner,” he said.
To be sure, observers noted there’s plenty of variability in the numbers for nonequity pay. No matter the firm, the composition of that tier itself ranges pretty widely, from recently-promoted associates to new laterals who are there on a mostly interim basis, to long-tenured and skilled lawyers with good business who simply chose to stay out of the equity group.
At the other end of the spectrum, when law firms have sizeable gaps in pay between income partners and equity partners, it can be very profitable.
“There can often be a big gap, a sizable gap between the highest-paid nonequity partners and the lowest-paid equity partners,” Binstock said. “And that can provide a lot of extra profit for a firm, where partners are reaching for the brass ring of equity because they will get a seven-figure jump, and they’re willing to tolerate multiple years at a lower level in order to have a seat at that table.”
Read the full post at law.com
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