Pros and Cons of Adding Another Partner Level

Smaller law firms that are reluctant to add more equity partners may consider creating nonequity partnerships to reward and retain high-performing associates and lure in laterals. However, this approach can come with both advantages and disadvantages so it requires significant forethought.

Alluring advantages

The traditional partnership model was such that if you did not make partner after the prescribed period, you had to find another firm or place to work. The new model of “partnership,” featuring the nonequity role, allows firms to retain some of their best talent. The nonequity partner concept allows these attorneys to continue to service clients without having to worry about building a book of business. It is especially appealing when such attorneys practice in lucrative niche areas.

There is a lot of value and prestige in having “partner” appear on a business card. The title conveys prestige without increasing the number of partners entitled to earnings, complicating governance or requiring capital. In many cases, promotion to nonequity partner has helped many attorneys turn into strong rainmakers and eventually equity partners.

Talented nonequity partners can lead teams and manage portfolios independently. Clients benefit from their deep experience and expertise, and equity partners have more time to expand their practices and do community and pro bono work.

Potential pitfalls

Nonequity partnerships can prove to be a good idea in certain situations, but they are not without their downsides. For example, if a firm is not careful, it can undermine profitability, because nonequity partners typically work fewer hours than equity partners and associates despite the increase in base pay that comes with the title. Firms generally can address this concern by providing less frequent pay increases and incorporating more performance-based variable pay.

Law firms that create a nonequity partnership tier also risk having the tier become an inefficient “boneyard” for good, but not particularly talented, attorneys. To avoid this outcome, firms need to incorporate some type of annual rating system (based on factors such as skills, productivity and experience).

Another issue is that many firms do not create enough of a distinction between income and equity partners in terms of competencies or responsibilities, creating confusion about roles and career paths.

Implementation issues

If your firm decides to proceed with a nonequity partnership tier, you must consider several issues ahead of time to increase the odds of success. For example, how can you make attaining the status meaningful to an attorney?

Start with some fanfare. Issue press releases and send announcements about the promotion to clients, other attorneys and the new partner’s friends and family. List nonequity partners on the firm website, letterhead and other marketing materials. You also can give a new nonequity partner some additional fringe benefits, such as life insurance, a firm credit card or club membership.

You will need to determine the role nonequity partners will play in governance. Consider sharing at least some financial information. Let them attend some partnership meetings and allow input on management decisions as nonvoting partners. You also can assign them to firm committees and base part of their compensation on firm performance.

At the same time, though, an equity partnership must remain distinct and ultimately more desirable. You want attorneys throughout the firm to continue to strive, rather than settle for nonequity partnership for the long term.

Proceed with caution

Creating a tier for nonequity partners is no small decision. It has substantial implications for a law firm — both cultural and financial — so exercise care.

Related Read: Why Two-Tier Partnership Structures Are the Right Solution

For more information, contact Justin Sylvan at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Law Firm Group.