October 23, 2012

What Being a Nonequity Partner Means: From Lifestyle to Leadership Choices

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September 2007 Issue | Volume 33 Number 6 | Page 12

Trends Report

What Being a Nonequity Partner Means: From Lifestyle to Leadership Choices

Digging deeper into the pluses and minuses—and opportunities—accompanying the nonequity track.

Creation of multitier partnerships has been a major trend for more than 10 years. Various sources estimate that over 60 percent of firms with more than 150 lawyers and 50 percent of firms with 50 to 150 lawyers now have at least one nonequity tier. And these days even smaller firms—some with as few as 10 lawyers—are joining in the trend.

So why does this trend continue to expand in firms of all sizes? From a firm’s perspective there are several reasons for creating a tier of nonequity or income partners. Whether firms admit it or not, the principal reason is usually to avoid slicing the profit pie into more, and possibly smaller, pieces to maintain a high net income per equity partner. But firms have other reasons, too.

One is to extend the track to equity partnership so younger lawyers have more time to develop their skills, including marketing and business development. Another is to retain associates who will not be elected equity partners and might otherwise leave the firm. And in some firms the real but unstated reason is to postpone the often difficult decision of who should be made a “full” partner.

On the other hand, there are more than a few young lawyers today who don’t want to become full partners. One reason is that they don’t want to assume the responsibilities required of equity partners. Another reason for many is that they have young and growing families and so don’t want, or can’t afford, to come up with the money to buy into the firm. But the most oft-stated reason is that they just don’t want to work the additional hours required of most full partners. The Holy Grail for these lawyers is a better quality of life.

Variations on Nonequity Partnership

There are two principal types of nonequity partnerships—permanent and temporary. In firms where the category is intended to be permanent, those who are made nonequity partners generally are not considered for equity status at a later time—although there can be exceptions.

In firms where the status is defined as temporary, or just an additional step to full partnership, associates (and sometimes laterals) are elected nonequity partners for a designated period, usually not more than two years. They are then considered for equity partnership. The additional time before reaching equity status enables these lawyers to gain more experience in their chosen areas of practice, in client service and in business development. And, of course, it gives the firm more time to evaluate these lawyers’ potential as stakeholders.

Some firms that have a temporary nonequity tier also provide for exceptions so that a “fast-track” associate may bypass the tier and be elected directly to equity partnership. Some of these firms also allow associates to request temporary nonequity status if they wish to work part-time for a while (usually to start a family) but then return to full-time practice.

In addition, some firms combine the temporary and permanent categories in their nonequity tier. A key advantage of having both is that it provides some flexibility in allowing a supposedly “permanent” nonequity partner to enter candidacy for equity partnership at some point in the future.

Regardless of whether it is temporary or permanent (or combined), nonequity partnership generally involves the following:

  • No capital contribution or buy-in.
  • Designation as a partner in all firm directories and materials.
  • Voting on all matters except compensation of equity partners; admission of equity partners; merger or dissolution of the firm; and in some firms, election of the managing partner or executive committee.
  • Serving on all committees except the executive one. Some firms, however, do provide one non-voting seat on the executive committee for a nonequity partner, with only the firm’s nonequity partners voting for that seat.
  • A share of the profits, based on the lawyer’s performance. Most firms designate a percentage of the profits for distribution among the nonequity partners.

Disadvantages and Advantages Accompanying the Role

As other commentators have noted, probably the principal disadvantage of nonequity partnership—especially in firms where it’s a permanent status—is that these partners may be considered “second-class” citizens by others in the firm (and even by themselves). This is particularly true in the case of lawyers who still want to become equity partners. As a result, some of them will gladly leave the firm if offered equity status elsewhere.

But there are some significant advantages for nonequity partners. Outside the firm, they are titled and regarded as “partners,” on the same level as equity partners. If their nonequity status is temporary, they have additional time to develop, professionally and personally, before facing the possibility of not being elected to equity partnership. Those lawyers who would be considered for equity status but wish to work part-time (for a few years or permanently) can still become partners. And lawyers who want to be part of the firm but don’t wish to assume the financial obligations (or risk) and the time commitments required of the stakeholders can still become partners.

It should also be noted that in many firms some of the nonequity partners receive higher compensation than some of the equity partners.

Leadership Opportunities

In addition to the preceding advantages, there are also leadership opportunities for nonequity or income partners. Most of these are the result of serving on and, in some cases, even chairing important committees in the firm. Some examples of key committees that often include nonequity partners are technology, recruiting and marketing. Plus many firms include at least one nonequity partner on the strategic planning committee. And in the firms that include nonequity partners on the executive committee, these lawyers are generally considered to be among the firm’s future leaders.

Furthermore, as mentioned earlier, there are firms that appoint a nonequity partner as the chair of an important committee. As just one example, in a client firm of mine, which has 37 equity partners and 10 nonequity ones, the chair of the technology committee is a nonequity partner and is in charge of developing the firm’s first technology plan.

So, whether they become nonequity partners because of lifestyle choices, financial reasons or otherwise, these lawyers can still achieve leadership roles in their firms if they want to. Referring to the old television ad for Stroh’s beer, a nonequity partner leader even said to me recently, “It doesn’t get any better than this.”

About the Author

Robert W. Denney doesn’t drink Stroh’s beer, but he is President of Robert Denney Associates, Inc., a management, marketing and strategy boutique that consults with law firms throughout North America. He can be reached at (610) 964-1938.