Miscellaneous

Non-Equity Partner Tiers at Law Firms

By Bill Gratsch

Jim Cotterman at Altman Weil recently wrote about Non-Equity Partner Tiers at his weblog, Cotterman on Compensation.   Mr. Cotterman's post included a reference to an academic paper on the subject.   The paper, written by Indiana Law Professor William D. Henderson, summarized that the

...The conventional explanation for the growth of the two-tier system (or, conversely, the abandonment of the single-tier) is that it produces higher profits per equity partner (PPP), thus solidifying the prestige of the firm and improving its ability to attract the best legal talent. Drawing upon a comprehensive dataset of Am Law 200 firms, this study documents that average PPP is significantly higher in single-tier firms, even after controlling for geographic market segment and firm leverage. The higher profitability of single-tier firms appears to be a function of higher levels of reputational capital, which enable single-tier firms to (a) attract and retain a more lucrative client base, and (b) run a more rigorous promotion-to-partnership tournament.

Based upon a ten-year longitudinal sample, this study also found negligible statistical evidence that the two-tier structure, after controlling for relative starting position and geographic market, is associated with larger gains in PPP. In light of its uncertain financial benefits, the author theorizes that the two-tier structure is primarily a bonding mechanism used by less prestigious firms to institutionalize a marginal product method of partnership compensation and consolidate managerial control for the benefit of the firm's most powerful partners. Failure to switch to the two-tier structure leaves the firm vulnerable to defections and possible collapse. As a result, the primary economic benefit of the two-tier format may be firm stability rather than higher average PPP...

Read the above snippet in context here:  An Empirical Study of Single-Tier versus Two-Tier Partnerships in the Am Law 200

Mr. Cotterman, for his part, opined:

So should anyone consider a second tier?  Perhaps.  There are still some benefits to a second tier including  establishing a career option for critically important senior advisors and the very best technical specialists who do not want the responsibility of full ownership ? the ?pride of partnership?; or, as a proving ground for those who have yet to demonstrate sustained business generation in acceptable quantity and quality but who you consider are more likely than not to do so.  Undertaking tiers still requires carefully stated objectives (including how this structure relates to the firm?s strategic intent; clearly articulated rigorous admission standards for both tiers; that the firm design the tier to be a desirable career path; and, that the equity partners reach consensus that this is a good thing to do.

Interesting reading.

Links to more information:

An Empirical Study of Single-Tier versus Two-Tier Partnerships in the Am Law 200, Professor William D. Henderson

More on Non-Equity Partner Tiers - Cotterman on Compensation

Full post as published by Blawgs Blog by Bill Gratsch on April 01, 2008 (boomark / email).