Financial Considerations That Involve Your Partnership Agreement

Recognizing Two-Tier Realities

A new report by Georgetown Law School's Center for the Study of the Legal Profession shows that it is not. See “2013 Report on the State of the Legal Market,” http://bit.ly/15lMX1N. The report says that as firms have struggled with sluggish demand growth and low productivity, they have increasingly raised the bar for equity partnership while increasing non-equity partnership positions. Of the country's 200 largest law firms:

• 169 of them have two-tier equity/non-equity partnerships.
• The percentage of lawyers who are equity partners in these firms dropped to 25% in 2011, down from 34% in 2005 and 36% in 2000.
• Spreads in compensation between the highest- and lowest-paid partners (even within equity partner ranks) have widened from the 4:1 or 5:1 range to 6:1 or 7:1 or even higher.

Such corporate law firms increasingly mirror the pay gap between top corporate executives and the rest of their workforce. Yet “employee” non-equity partners own the firm and thus are responsible for its debts. When partners have unequal rewards but share equal risk it leads to a situation that, according to many accounts, produced the Dewey & LeBoeuf bankruptcy. The firm had hired many lawyers with very high guaranteed compensation, often by agreements structured without informing the general partnership. When the fortunes of the firm sagged, the high-rollers bailed, the firm died ' and the rest of the partners were left holding the bag.