United States: Should Your Firm Consider A Two-Tier Partnership System?

If your firm hires and retains only partnership-track associates, it could be turning away profitable legal talent. Offering a two-tier structure, with equity and non-equity partners, might make your firm more attractive to recent law school graduates while also helping you hold on to more experienced attorneys who need some flexibility.

Capital Contributions

Under a two-tier system, a firm has two different types of partners, with different responsibilities, roles and levels of financial commitment. Equity partners generally make a capital contribution and participate directly in the firm's profits. They are personally liable for the firm's debts and have ultimate control over its policies and strategic direction.

Non-equity partners — also known as contract, fixed-dollar, salary, income or non-share partners — make no capital contributions and share in profits only indirectly through salaries and performance bonuses. They may be indemnified by equity partners and, while they might participate in partner strategy meetings, generally have only limited voting rights.

The two-tier system represents a clear contrast with the old "up or out" model. Traditionally, firms have had only equity partners and equity partners-in-waiting in the form of associates who hope to make partner. The problem with such a structure is clear: Skilled attorneys who lack business development skills or would rather devote their time to legal work can get pushed out.

Off the Beaten Path

The primary benefit of a two-tier system is that it enables firms to keep talented attorneys in the fold. However, it is not only non-rainmaking attorneys who might find a non-equity partnership appealing.

As Millennials gradually come to dominate the American workforce, a greater percentage of employees are demanding a better work-life balance. This cultural trend is catching many employers, including law firms, off guard. Younger attorneys may be profitable and productive and yet not want the office-bound lifestyle associated with a traditional partnership track. Some, however, may want to keep that option open farther down the road; for example, after they have raised a family.

Non-equity partnerships can also help attract senior attorneys with desirable niche experience. Letting partners off the hook for business development can help your firm land coveted specialists who indirectly bring in new clients that require specific legal expertise. Finally, non-equity partnerships are likely to appeal to attorneys who need to take time off from the firm, for lateral hires and for retiring partners.

Keeping Compensation Fair

The two tiers of partners naturally are compensated differently. Non-equity partners should be well paid — earning significantly more than senior associates — based on their skills, hours worked and factors such as client satisfaction. However, their compensation should be less than that of equity partners who have made bigger financial and professional commitments to the firm.

If your firm adopts a two-tier system, try to be consistent with how you compensate non-equity partners. This can be a challenge when the non-equity track includes, for example, rising associates, lateral hires with big books of business and former equity partners nearing retirement. The amount and quality of such individuals' work can vary dramatically.

Advantages Outweigh Drawbacks

Two-tier partnership tracks are not without potential drawbacks. In some firms, the non-equity tier could be seen as a refuge for second-class or underperforming attorneys. However, the advantages of the system generally outweigh such risks — especially if you solicit plenty of feedback from your attorneys and consult a financial advisor experienced in partner compensation issues.

Sidebar: A Part-Time Option

A flexible firm does not only offer two partnership tracks, it also provides partners with the time flexibility they need to stick with your firm and produce their best client work. If you do not already, consider allowing part-time partnerships.

To ensure that a part-time option works for everyone, clearly define the terms and responsibilities of such partnerships. Your firm's policy should spell out a partner's minimum work hours and schedule. If you are unsure about how the arrangement will work out, include a probationary period that allows either the partner or your firm to terminate the arrangement.

It is critical that part-time partners set goals around the hours they need to bill each year and the time they need to devote to firm duties. Your firm should compensate these partners based on how well they achieved these goals, along with other criteria.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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