The Evolving Law Firm Food Chain: What’s in a Name?

Firm Chairman/Managing Partner/Chief Executive Officer. This is the top of the big law firm pyramid. Typically, a small group of a firm’s most powerful partners selects this person to focus primarily on running the firm, rather than practicing law. Once in power, this individual usually sets the tone for the entire institution.

Equity Partner/Shareholder—“The Players.” All equity partners share in the firm’s profits, but the players select (or nominate candidates to become) the chairman. Often the players comprise a firm’s executive or management committee. Together with the chairman, they establish the firm’s culture. During the past decade, the players have increased their power as the internal gap between highest and lowest paid partners within most equity partnerships has concentrated wealth at the top. In other words, the players are accountable to each other but to no one else. The players’ primary allegiance is to the preservation of their collective share of the firm’s annual profits. They also seek to maximize personal prestige and status. At many firms, the result is an unhealthy “partnership-within-the-partnership,” described in greater detail below.

Equity Partner/Shareholder—“The Non-Players.” With the concentration of wealth and power at the top, the middle class of equity partners has become an endangered species at many firms. Formerly, this middle group of partners collectively provided a check against the otherwise unbridled discretion of the players. But at many big firms, the middle group has shrunk out of existence while a larger group finds itself relegated permanently to the bottom of the equity partnership. Unless they have the ear of a player, non-players don’t feel like fully participating members of the equity partnership because they aren’t. This skewed equity partner compensation and power structure has many unfortunate consequences, one of which is the enhanced potential for the firm’s collapse (e.g., Dewey & LeBoeuf).

Non-Equity Partner. The outside world thinks that these people are partners. Everyone inside the firm knows better. Except insofar as their actions can create joint and several liability for fellow partners, non-equity partners are just like associates (discussed below). Adding insult to injury, some firms now require non-equity partners to make capital contributions—a forced investment from an attorney who doesn’t share in the firm’s profits. Typically, this category includes two broad subgroups: attorneys pursuing promotion to equity partner and permanent non-equity partners whose future is self-evidently limited. Some joined the latter subgroup as part of a bargain that many firms now offer: steady employment at a decent wage without the heinous demands associated with the competition for equity partner. Others had more ambitious plans, but the prevailing law firm business model didn’t have room for them in the equity partner ranks. Non-equity partner can also include retired equity partners, as well as attorneys whose limited specialty areas generate insufficient revenues and profits to justify their participation in the firm’s profits as equity partners.

Associate. Absent any of the modifying descriptions below, these young lawyers are on a partnership track—or so they think. Eventually, most of them will discover that they’ll never make the non-equity partner cut, much less the rarified air of equity partner.

Senior Counsel. For big law attorneys who live long enough, the fate of senior counsel awaits them. It can include retired partners (equity and non-equity). Sometimes it’s also a place to park newly hired laterals during the year before they become equity partners. In some firms, this category can also include people who fit the description of non-equity partner insofar as they believe they have job security without sacrificing their lives in the competition for equity partner.

Of Counsel. This category can include lawyers who also fit the senior counsel and non-equity partner categories. At many firms, these lawyers work on a per hour basis at a set hourly rate far below what the firm charges clients for their work. Some firms also put their retired partners in this category. Regardless of what anyone calls them, they don’t share in the firm’s profits.

Counsel. This category can include attorneys in the senior counsel and of counsel categories. The title makes these lawyers feel better than they would if the firm identified them as associates or senior associates. The category can also include attorneys who are not on the partner track and attorneys who have special deals to work reduced hours. Usually, lawyers in this group are not on a path toward partnership of any kind (i.e., they won’t become even non-equity partners).

Senior Associate. These are associates who have several years of experience. Some are on a partnership track; others have failed to advance and never will.

Permanent Associate. This lawyer’s career at the firm has hit its zenith. There are two subgroups of permanent associate: senior associates who started their careers on the partner track but didn’t become non-equity partners, and career associates who knew from the outset that they would never be competing for a partnership position. Career associates earn a lot less money than associates who started on a partnership track.

Department Attorney/Practice Group Attorney. Usually, this is an associate who has reduced hours and lower pay. These lawyers are not on a partnership track. Some never were.

Staff Attorney. This lawyer is not on any partnership track. Typically, staff attorney compensation is far below whatever their associate counterparts receive. They are able to say that they have jobs requiring a JD degree, but they have no realistic prospects for a long-term career at their firms beyond their staff attorney status. For some young lawyers struggling to find law jobs in a dismal market, that seems to be enough.

Contract Attorney. These lawyers are similar to staff attorneys, only their situation is worse. That’s because contract attorneys typically aren’t even law firm employees. That means they don’t qualify for any firm benefits that associates receive (e.g., vacation, sick days, health insurance). Most often, these lawyers work on a per assignment basis. Their jobs last only as long as a specific case or transaction. Most of them perform relatively low level tasks. Recently, some contract attorneys sued their employers, claiming that their work was so routine and mindless that it didn’t rise to the level of practicing law.

The Problem with This System

So what’s the big deal? Law firms have developed a series of titles and categories for their attorneys. What’s wrong with that? In a word: everything.

For the most part, law firms marketing the flexibility that supposedly accompanies a large collection of attorney labels have found a receptive audience. Today’s youngest lawyers have lived through the Great Recession, during which new graduates struggled to find any JD-required job that paid enough to begin chipping away at their six-figure debt. They’re redefining their career goals away from grand aspirations and toward mere survival. They are willing—even eager—to accept the only deal that many law firm leaders are now offering. I know this about our youngest generation of attorneys because I’ve spoken with many of them.

“Did you hear about the list of new equity partners?” asked a young associate several years ago.

“Yes,” I replied. “Surprised?”

“Not very many people made it,” he answered.

“That’s true,” I said. “But that’s not new. This is a tough place.”

Tight standards for admission into many equity partnerships (especially in prestigious New York firms) existed long before I graduated from law school almost 40 years ago. My former firm was among the pioneers of the two-tier partnership structure. During the limited years after you became a non-equity partner, the outside world viewed you as a partner. Inside the firm, everyone knew it was a proving ground. The only truly relevant milestone still remained: advancement to equity partner. When it came to meaningful participation in firm decisions that mattered, the distinction between equity and non-equity partner was everything.

“I wish the firm could provide more job security,” the associate continued.

“What do you mean?”

“I’d be perfectly happy to keep making the money that I get paid as an associate, even if I don’t advance to non-equity partner or equity partner,” he said.

“Really?”

“You bet. That’s a lot better than working here for years, only to be told you aren’t going to make it. Then you have to start over somewhere else.”

He was alluding to the up-or-out system. Non-equity partners who failed to advance to equity partner moved on. There were exceptions, but typically the exceptions were people with niche practices who didn’t pose potential blockage issues for promising associates hoping to become non-equity partners.

“Ah, another risk-averse attorney,” I smiled. “We’ll talk again after you become a non-equity partner.”

Over years that included chairing my firm’s associate review committee, I’d seen a sufficient range of associates to have confidence that he’d clear the non-equity partner hurdle. Whether he’d go on to equity partner would involve the interaction of talent, opportunities, fortuity, and internal firm politics over the next decade. No one could predict his ultimate fate.

The simple fact is that most large firms have made the path to equity partner far more daunting than it was for their own generation (which is also mine). Therein lies the truth about what is really happening at many firms now marketing new lawyer titles. It might look like a response to the so-called unique desires of the next generation. But a lot of self-interested equity partner greed lurks behind that sound bite.

At a superficial level, big firms profess that they have heard the concerns that my young colleague voiced. Rather than commit themselves to the equity partnership competition, they can earn decent money as “special counsel,” “counsel,” “senior associate,” or even “permanent associate.” Their legal careers at their firms might be limited, but they don’t care. They view the trade—giving up the rigorous demands of a high-powered big firm position on the equity partner track in exchange for “a real life”—as worth it.

They could be correct, but some may also be misperceiving the underlying reality of the situation and selling themselves short. Law firm leaders are offering these new titles, labels, and options out of short-term self-interest, not generosity. As clients continue to scrutinize outside legal fees, equity partners make a lot of money on the off-track attorneys who have become quite valuable. Stories about clients refusing to pay the $350 and up hourly rates of first- and second-year associates have become commonplace since the Great Recession began. Even so, those same clients have little or no objection to the much higher rates of permanent off-track lawyers.

Firms are hanging on to experienced lawyers while simultaneously holding them down. Excluding them forever from participation in the firm’s profits as equity partners is consistent with a key tenet of the current big law firm business model: maximizing short-term profits without regard to the long-run implications for mentoring, collegiality, institutional stability, and transition of client relationships.

As a consequence, the alternative categories are limiting the careers of young attorneys in unprecedented numbers. The insidious process of pulling up the ladder on the next generation is a relatively recent development. The most obvious manifestation has been a surge in the numbers of non-equity partners at big firms. Not so long ago, few firms had a non-equity partner tier, much less a permanent one. As recently as 1994, more than half of the Am Law 100 did not have two-tier partnerships. See William D. Henderson, An Empirical Study of Single-Tier versus Two-Tier Partnerships in the Am Law 200, 84 N.C. L. Rev. 1691, 1695 (May 2006). Associates moved through the ranks and either became partners or left the firm. Today, only 17 Am Law 100 firms have single-tier partnerships. See Michael D. Goldhaber, The Great Class Divide, Am. Law., May 2014, at 150.

The subsequent rise of the two-tier system reveals itself vividly in higher law firm leverage ratios (non-equity lawyers per equity partner). From 1985 to 2010, the average leverage ratio for the Am Law 50 more than doubled—from 1.76 to 3.54. See Catching Up with the Class of ’85, Am. Law., May 2010, at 102. Here’s another way to restate that statistic in human terms: It’s twice as difficult to become an equity partner in a big firm today as it was 30 years ago. Are our children that much dumber than we were?

From 1998 to 2008, the number of equity partners in Am Law 100 firms grew by one-third, but the number of non-equity partners tripled. Since 2008, the number of equity partners in the Am Law 100 has declined by more than 3 percent. Meanwhile, the non-equity partner group has been the fastest-growing personnel category, increasing by almost 5 percent in 2013 alone. Non-equity partners now account for 40 percent of all partners; 10 years ago, they accounted for 28 percent. See Aric Press, Big Law’s Reality Check, Am. Law., Nov. 2014, at 45.

Go back another decade and the trend becomes even more pronounced. Overall, the composition of Am Law 100 firms in 1994 was 35 percent equity partner, 5 percent non-equity partner, and 60 percent non-partner. See Goldhaber, supra, at 150. By 2013, equity partners accounted for only 22 percent of attorney head count; the non-equity partner category had risen to 16 percent; non-partners comprised 62 percent. See id. In other words, as firms offer more options to young attorneys, managing partners’ motivations are as obvious as their resulting financial reward. Fewer equity partners means more money for those who obtain that brass ring.

Shifts in Equity Partners

A related feature of the evolving big law model is an important corollary to the shrinking ranks of equity partners. It concerns the two-class system within equity partnerships: the players and the non-players. The concentration of wealth and power within equity partnerships mirrors our society. The rich have become richer, and becoming a new equity partner isn’t what it used to be.

Don’t get me wrong; no one feels sorry for any big firm equity partner today. They all earn middle six- to low seven-figure incomes. Even the lowliest of big firm equity partners earn far more money than most of them ever thought they’d make, back when they were attending law school. But equity partner compensation at the top of some firms has become, well, obscene.

For a long time, the top-to-bottom income spread within most equity partnerships was 4-to-1. In most firms, the biggest rainmaker earned only four times more than the most junior equity partner. In those days, one of my law firm mentors told me, “My income is capped. The only way I can make more money is to grow the pie. The only way to do that is to make you a better lawyer who attracts new clients and more business from current clients.”

Today, that incentive to make young lawyers better has disappeared. Five-year associate attrition rates of 80 percent at big firms reduce a partner’s willingness to mentor young attorneys. At most firms, the compensation structure pushes senior partners to hoard clients, guard billings against all intruders (especially those within the firm), and create an aura of indispensability that makes clients reluctant to trust anyone else. As senior partners claim credit for every client dollar they can, the big firm eat-what-you-kill system rewards their unfortunate behavior. That’s how the top-to-bottom spread within most equity partnerships exploded to its current median: 10-to-1. At now defunct Dewey & LeBoeuf, the spread exceeded 20-to-1. That is also how a partnership-within-a-partnership emerges.

When each member of a small group of equity partners makes eight or 10 or 20 times more than similarly labeled equity partner colleagues, it’s natural for that group to regard itself as including the only voices that matter. They determine every partner’s compensation, including theirs. They set the cultural tone for the institution. They chart the firm’s course. In that environment, hubris can become contagious. Who among the lesser voices is inclined to speak up? No one who worries that dissent could produce an unwanted impact on his or her compensation for the upcoming year.

Implications for the Future

The long-run implications are important, both for the individual non-equity partner (and other special category attorneys) and for the institutions that exploit them. That’s right—exploit them. Thirty years ago, the widespread hostility to anything that looked like a permanent non-equity partner group arose from what seemed to be reasonable concerns. One was individual and institutional morale. By definition, young lawyers at any big firm come from the top of their classes at the best law schools. Ambitious and motivated, they worked hard to get in the door and have become accustomed to success at everything they’ve done. For them, failure to advance to the next step of their careers—equity partner—can be demoralizing. Even worse, unhappy attitudes spread like wildfire throughout any organization, especially among the newest recruits. Imagine how much worse it is today for similarly talented law school graduates who find themselves relegated involuntarily to the newest categories, such as permanent associate, at the start of their careers.

Another consideration was blockage. A law firm’s only true asset is its people. Permanent non-equity partners can deprive more talented junior attorneys of career-advancing opportunities. For anyone concerned about the long-run health of the firm, the implications were enormous.

Times have changed. At most firms, the desire to develop talent for the long run has yielded to misguided metrics that seek only to increase short-term equity partner profits. That’s one reason more than 80 percent of Am Law 100 firms now have two-tier partnerships. The evolution of the big law firm business model—maximizing short-term profits at the expense of long-run values—has a lot to do with that. Put simply, non-equity partners are profit centers for law firms. Their hourly rates are high and their salary is fixed. For purposes of leverage ratio calculations, non-equity partners (and every other category of attorneys who don’t share in the firm’s profits) are just like associates.

Accordingly, it’s no surprise that equity partner profits at big firms have grown so dramatically over the past three decades. In the 1985 inaugural list of the Am Law 50, the average was $300,000—about $650,000 in today’s dollars. In 2014, it was more than $1.6 million.

Creating labels that imply job security for young attorneys as they age sounds comforting, especially as the cost of their JD degrees burdens them with six-figure law school debt. But at what point do young lawyers who have succeeded at everything else in life become discouraged? For anyone who views job satisfaction as an important component of overall happiness in life, it’s a serious question. As new associates join the firm, how will they regard these “special attorneys” who opted out of the type of ambition that, presumably, still drives them as their own careers begin? If attorneys with limited futures are doing interesting and meaningful work, won’t they block young on-track attorneys from those opportunities? The circles quickly become pretty vicious.

Clients have an important role in all of this. Even as they balk at paying high hourly rates for first-year associates, they scarcely blink when a non-equity partner or permanent associate billing at a much higher rate shows up on a monthly invoice. It is a shortsighted approach. Young lawyers of today are the wise counselors of tomorrow, but only if someone is willing to invest the time and effort necessary to create environments in which judgment and wisdom can flourish. If clients are unwilling to pay for young associates’ time, they should force equity partners to make the investment by using those lawyers anyway and writing off their time. The current regime cannot ensure the orderly transitions that ensure a law firm’s survival and the resulting continuity of client service.

Newly minted lawyers have responded predictably to the in terrorem impact of the evolving big law firm business model. The doubling of leverage ratios tells young associates that promotion to equity partner is an unrealistic dream. The sensible thing is not to pursue it. In the 2014 American Lawyer new partners survey, 42 percent said that it was nearly impossible to become a partner at their big firms—and those were the ones who had achieved it! See M. P. McQueen, The Path(s) to Partnership, Am. Law., Nov. 2014, at 66. Even among the 58 percent of respondents who disagreed with that assessment, some commented, “It’s not impossible, but it is certainly very competitive and difficult.” Significantly, 60 percent of those pessimistic respondents were describing the advance to non-equity partner status, not the far more daunting challenge of becoming an equity partner.

Sure, associates can float along on their confirmation bias for a while. After all, they tell themselves, somebody has to make equity partner. Why not me? Eventually, the vast majority learns that few law firm leaders follow entertainer Jack Lemmon’s admonition to those who succeeded in his difficult business: “Send the elevator back down.” Instead, too many big law leaders are building penthouse apartments with restricted access to those rarified heights.

But, hey, if young lawyers are willing to buy the argument that firms promising to cap their nascent careers are just giving them what they want, why urge the next generation of lawyers to reach for more? Here’s the answer: The model underlying the current approach is dangerous for firms, clients, and the profession. Young lawyers entering big firms have more options—and more power over their own lives—than they realize. Foresighted leaders committed to hiring, developing, training, and retaining the best new law graduates will view their firms as something more than a collection of practitioners bound together solely for the pursuit of current profits. They’ll become mentors who offer protégés seeking advancement a realistic shot at success. A few of them may even remember that someone once did that for them.