Non-Equity Partnership Can Benefit Firms—And Lawyers, Too

But firms must manage their non-equity tier well, in order to maximize the benefits and avoid the pitfalls.

The Chicago headquarters of Winston & Strawn, one of several Chicago-founded firms where non-equity partners outnumber equity ones (by David Lat).

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What’s in a name—or a title? When it comes to “partner,” a lot.

In two lawsuits—one filed in February against Thompson Hine, and one filed in July against Duane Morris—lawyers allege their firms mistreated and discriminated against them. And they lay some of the blame on their status as non-equity partners.

Rebecca Brazzano, the ex-partner suing Thompson Hine, describes her title of income partner as “meaningless” and “more akin to an albatross.” Meagan Garland, the partner suing Duane Morris, claims in her complaint that Duane Morris “unlawfully classifies its non-equity partners as ‘partners’ and business owners of the Firm for taxation and employment purposes, when in fact these non-equity partners are employees who misleadingly bear the title of ‘partner.’” Both firms deny the allegations and are fighting the lawsuits.

What exactly is a non-equity partner? In most businesses, a partner is “a co-owner or investor in a business,” with an equity or ownership stake and an entitlement to share in the profits. So “non-equity partner” might sound like an oxymoron—a “non-partner partner.” (Leave it to lawyers to come up with such a ridiculous—or clever—redefinition of a term.)

Regardless of what you call them, non-equity partners—also referred to as non-share or income partners, depending on the firm—are proliferating. The number of non-equity partners in the nation’s 100 largest law firms rose by 5.3 percent in 2023, while the number of equity partners actually declined. With non-equity partners representing 49.4 percent of all partners in these firms, they will likely outnumber equity partners in the near future.

The Rise Of Non-Equity Partnership

Non-equity partnership took off after 1985, when The American Lawyer started publishing rankings of law firms according to various financial metrics—including the closely watched statistic of profits per equity partner. Law firms strive to keep this number high, which projects strength in the market.

Having a tier of non-equity partners who are less highly compensated than equity partners allows firms to maximize the payouts to the equity partners—at least compared to the traditional partnership model in which (1) all partners were equity partners and (2) compensation was lockstep, i.e., based purely on seniority. And paying equity partners generously—or from their perspective, what they’re worth—is essential to holding on to major rainmakers in an increasingly active lateral market.

For decades, firms with all-equity partnerships tended to be, as a group, more profitable and prestigious than firms with non-equity partners. As Professor Bill Henderson of Indiana University Maurer School of Law reported in a 2006 article in the North Carolina Law Review, profits per partner were “significantly higher in single-tier firms,” which he attributed to these firms’ “higher levels of reputational capital”—i.e., greater prestige.

But times have changed—and to the extent that non-equity partnership was once seen as déclassé, that’s no longer true.

“There is no cachet to having a single-tier partnership,” said Bruce MacEwen, president of the law firm consultancy Adam Smith, Esq. “Latham and Kirkland have not been single-tier for years—and they have plenty of cachet.”

Today, 85 of the 100 largest law firms have non-equity partners. And their ranks include such venerable names as Cravath Swaine & Moore and Simpson Thacher & Bartlett.

Some critics of non-equity partnership see it as a degradation—of both the English language and the notion of partnership, reflecting law’s unfortunate transformation from a learned profession to a cutthroat business. But it’s not necessarily a negative development; non-equity partnership might just be an update of the concept of partnership.

As MacEwen pointed out to me, elite consulting firms and investment banks might have as many as eight to 10 tiers of professionals—and they’ve been like this for years. Having more than just three or four roles—partner, associate, and counsel or of counsel—is simply a hallmark of what it means to be a modern professional-services firm, in an increasingly complex environment for the delivery of legal services.

The Advantages Of Non-Equity Partnership

There are reasons why the non-equity partnership is increasing in popularity. The bottom line is that it’s useful, to both law firms and individual lawyers.

“Well-conceived and well-managed non-equity partner tiers can fuel strong and highly profitable growth,” said consultant Peter Zeughauser of the Zeughauser Group. “They can materially contribute to a high-performing culture.”

The non-equity tier is used by different firms in different ways. Some firms, like Kirkland & Ellis, treat non-equity partnership primarily as a way station on the path to equity partner. And from the firm’s perspective, the longer track is a feature, not a bug.

“The original brilliance of the idea was the so-called ‘Chicago model,’ named after the Chicago-founded firms—most famously Kirkland—that pioneered it,” explained Zeughauser. “These firms used the non-equity-partner track to lengthen an associate’s time before making equity partner. Firms make most of their money on experienced senior associates with partner titles whom they can charge a lot of money for and who don’t require a lot of training. And shrinking the equity partnership increases profits per equity partner.”¹

Other firms use the non-equity tier for so-called “service partners”—who don’t generate enough business to justify getting paid like equity partners, but who still play an important role in serving clients (often in niche areas like tax or ERISA). Still others might use it for former equity partners who are looking to slow down as they get older—“a glide path for retiring partners,” as Janet Stanton of Adam Smith, Esq. put it last year in a detailed analysis of non-equity partnership.

Being able to call non-equity partners “partners” offers multiple advantages to firms. First, the more exalted title allows firms to bill out these lawyers at higher rates—which can be extremely profitable. Case in point: Kirkland & Ellis, where it’s been estimated that the average non-share partner bills close to $2 million more than they are paid.

Second, to the extent that they’re up-and-coming lawyers who want to start building books of business, it’s easier to attract clients when your business card says “partner.” As Janet Stanton wrote, “Thrusting an associate directly into full equity status, and judging them immediately by their performance in roles they have never assumed and have no training for, invites disaster all around.” Non-equity partnership can be a “reasonable transition period,” in which associates are presented as partners to the outside world and mentored in their business-development efforts.

Third, the non-equity role can be useful for retaining service partners. As noted by Stanton, there are many “highly proficient, productive, and desirable lawyers” who just happen to lack the desire or talent for business generation—and who might otherwise be lured away by firms willing to make them partner.

Fourth, having a non-equity tier can be used for trying out lateral partner hires. If they turn out to be good fits, they can be promoted to equity partners; if they don’t, the firm can part ways with them more easily (because depending on a firm’s partnership agreement, dismissing equity partners can present challenges).

And non-equity partnership can be appealing to individual attorneys as well. As a group, lawyers place a lot of stock in prestige—one factor that drew at least some of us to the high-status legal profession. People you meet at a cocktail party or relatives at Thanksgiving will raise their eyebrows approvingly when you say you’re a law firm “partner”—and they won’t have any idea about the difference between equity and non-equity.

Non-equity partnership at top law firms is a bit like grade inflation at elite universities: it’s arguably misleading, at least to outsiders—a kind of doublespeak, where an “A” isn’t really an “A” and a “partner” isn’t really a “partner.” But both practices have become increasingly widespread because their advantages, for the institutions and individuals on the inside, outweigh the obfuscation to the outside world.

Best Practices For Firms With Non-Equity Partnerships

So at the end of the day, non-equity partnership can be a useful tool for law firms that want to attract or retain talented lawyers while maximizing their leverage—and profits per equity partner. But like any tool, non-equity partnership must be used wisely.

If non-equity partnership gets a bad rap, that might be because many firms haven’t been deploying it correctly. As Janet Stanton put it, “Having an interim partnership tier or tiers makes theoretical sense, but in reality, it has been incredibly poorly managed by firms.” Or in Peter Zeughauser’s words, “Biglaw’s challenge is that poorly conceived and managed non-equity tiers have spread like a cancer, marking too many firms with underperforming cultures.”

So how can firms reap the rewards of non-equity partnership while avoiding the pitfalls? Here are some recommendations.

First, firms must have a clear vision for their non-equity partnership. In Stanton’s words, “Make sure you know why you have/want non-equities and exactly what purpose they should serve.”

Second, firms need to be internally transparent about the meaning of non-equity partnerships. Individual non-equity partners should know exactly where they stand. Are they still on track for equity partnership, or have they been passed over? If they’ve been passed over, can they remain at the firm indefinitely in the non-equity tier, or are their days numbered? Non-equity partnership should not be used to string along lawyers who aspire to equity partnership but will never get it.

Third, firms must actively manage their non-equity partnership. It’s all too easy for the non-equity tier to turn into an “island of misfit toys”—neglected in favor of the equity partners, who bring in the bulk of the business, and the associates, who are seen as the future of the firm. Or as Stanton put it, non-equity shouldn’t be “a parking lot for ‘pretty good’ senior associates with no real champions nor noticeable rainmaking skills.”

Firms that take a “set it and forget it” approach to their non-equity partnership could end up losing rather than making money from these lawyers—which defeats a key purpose of having a two-tier partnership. A 2023 report by Reuters found that non-equity partners billed significantly fewer hours than their equity counterparts—and it’s not hard to understand why.

As Peter Zeughauser told me, “Without any stake in the firm’s profits, over time non-equity partners tend to work fewer hours. So they’re more expensive and they generate less revenue. Over time, firms can get really sloppy with them.” Or as Bruce MacEwen put it, “Billing 1,400 or 1,500 hours a year, while getting paid $300,000? That’s not a bad life.” (Rebecca Brazzano, the former non-equity partner suing Thompson Hine, billed only 567 hours in 2020 and 936 hours in 2021, according to the firm.)

So what does active management entail? According to Janet Stanton, “It’s about good management hygiene: set clear expectations, reward the lawyers who exceed expectations, counsel the lawyers who don’t meet them, and ease out the lawyers who will not meet them.”

That might be easier said than done at some firms. “I’m just amazed at how uncomfortable lawyers are with having uncomfortable conversations,” Stanton told me. And it can be uncomfortable to have a difficult discussion with a non-equity partner—who, by virtue of having been at the firm for a while, will likely have some strong relationships, internally or with clients.

Active management also involves thinking carefully about the type of work that’s given to non-equity partners. It must be interesting and important enough to keep these lawyers engaged, but not to the detriment of developing associates.

“Most partners don’t like training associates,” said Zeughauser. “They’d much rather have a non-equity partner who already knows how to practice law and whose work they don’t have to review—it makes life a lot easier. But are the non-equity partners blocking opportunities for associates? Is the non-equity partner getting work that would otherwise have gone to an associate—work that can help the associate develop the skills necessary to become an equity partner?”

Fourth and finally, law firms shouldn’t use the non-equity tier to make themselves look, to the outside world, more diverse than they are. Meagan Garland’s lawsuit alleges that Duane Morris underpays its women and minority lawyers—and implies that making them non-equity rather than equity partners contributes to that pay gap.

In their research into non-equity partnership, MacEwen and Stanton came across what they described to me as “anecdotal” rumblings that non-equity partnership at some firms is a “ghetto” for diverse lawyers. And although they were unable to find data to support these specific claims, it is a fact that women and people of color are underrepresented among the ranks of equity partners at major law firms.

In 2023, only 23.7 percent of equity partners at multi-tier law firms were women and just 9.6 percent were people of color, according to the National Association for Law Placement. Non-equity partners as a group were significantly more diverse: 33.3 percent women, 14 percent people of color.

So firms should continue their efforts to diversify their equity partnerships. It’s not sufficient to diversify their non-equity partnerships, tout all the diverse lawyers on their websites with the “partner” title, and call it a day.

The old “up or out” model, in which associates either made (equity) partner or left the firm, was a creature of tradition. And while it still works for some law firms and lawyers—including my former firm, Wachtell Lipton, which has a single-tier partnership and the highest profits per partner in Biglaw—it doesn’t work for all.

If a lawyer still excels at and enjoys their work, and if the law firm still values that lawyer’s contributions, keeping that lawyer at the firm as a non-equity partner can make sense—as long as both parties agree on what they talk about when they talk about “partnership.”

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An abridged version of this article previously appeared on Bloomberg Law, part of Bloomberg Industry Group, Inc. (800-372-1033).

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1. Fellow Biglaw nerds / history buffs might be interested in the competing definitions of “Chicago model.” A 2011 Am Law Daily piece by Brian Baxter uses it in Zeughauser’s sense, referring to firms with a large number of non-equity partners compared to equity partners (who earn much more than their non-equity counterparts). A 2018 New York Law Journal piece by Christine Simmons describes Chicago-model firms similarly, as ones in which “lawyers make non-equity partner after about seven years and then, if they prove their business-generating potential within three to five years, they are promoted to equity partners”—and if they don’t, they’re out.

But a 2013 New Republic article by Noam Scheiber, citing Professor Bill Henderson, contrasts the Chicago model with the up-or-out Cravath model, describing the former as “less competitive”—reflecting the fact that the Chicago firms “typically had far more partnership slots available for the associates they brought on and promoted many more of them.” Although “traditionally less profitable,” the Chicago-model firms had the virtues of being “less rigid and hierarchical.” The New Republic piece was picked up by a Slate story by Mark Obbie, which characterizes the Chicago model as follows: “If the ‘Cravath model’ of up-or-out competition to make partner proves too daunting, there’s the alternative ‘Chicago model’ of moving in a straight line from summer clerkship through the associate ranks to the promised land.”

I think there’s a definition of “Chicago model” that can reconcile these different definitions. I view the “Chicago model” as basically the Kirkland model—because it’s always about Kirkland—in which (1) it’s less competitive to make non-equity partner, something that happens after six or seven years; (2) non-equity partners then have a few years in which to prove their business-generation prowess, which is highly competitive; and (3) if they succeed, they move up to becoming (obscenely well-paid) equity partners—and if they don’t, they’re out.