For partners who keep up with the news, this has been a troubling fortnight. First, my colleague Sara Randazzo reported the sad story of Gregory Owens, a former equity partner at the disgraced Dewey & LeBoeuf who filed for personal bankruptcy at the end of December. Despite earning an annual income of roughly $350,000 in his new role as an income partner at White & Case, Owens admitted in court papers to buckling under the financial strain of a $10,000-a-month alimony and child support award and a lingering million-dollar claim filed against him by the advisers overseeing the Dewey estate.
A week later, the great Jim Stewart (Am Law ’83) devoted his New York Times column to Owens’ story. But instead of drawing lessons about the brutal economics of divorce settlements or the high cost of a New York life, Stewart told a waiting world what American Lawyer readers have known for more than a decade: Law firm partnerships no longer come with promises of lifetime tenure. Equity partners face deequitization; income partners face defenestration. This was the column that launched a thousand emails to law firm chairs, as in, Hey Harry, See attached from the Times. We’re not worried, are we, buddy?
Three more phenomena will surely fuel the anxiety. The Am Law Daily and its sibling publications have begun publishing the first round of financial reports for our annual Am Law 100 project. Those early returns show only modest gains for firms and their owners (and, in some cases, losses). Last week, the February issue of The American Lawyer featured an essay by academics William Henderson and Christopher Zorn, calling into question one of Big Law’s growth strategies: its mania for acquiring lateral partners. And in a few weeks, Major, Lindsey and Africa, the recruiting giant, and ALM Legal Intelligence will release their latest large-scale findings on the satisfaction of partners who have switched firms. That provocative study, coming in the wake of the Henderson-Zorn thesis, will undoubtedly raise the question: What are those partners who have tarried waiting for?
These are, to use the current cliché, high-class problems. With Big Law’s owner-partner class still comfortably averaging million-dollar profits, the nation’s finest clubs will not soon see a raft of rent parties for their lawyer members. But clearly some of the heads that wear crowns lie uneasy. How much fear is reasonable or even prudent?
To begin to answer these questions, we need to review what’s happened to law firms over the past several years. Simply put, The Am Law 200, the 200 top-grossing firms in the United States, have changed their composition. On a percentage basis, they’ve thinned their ownership ranks, even as they’ve increased the number of lawyers they label as partners.
Most big firms now operate as two-tier partnerships; in 2012, the last year for which we have complete numbers, 171 of the Am Law 200 had both equity and income partners. (By our definition, partners have nonequity status if more than half their compensation is fixed; if more than half their compensation depends on firm performance, they have equity status.)
It’s in the second tier where law firms have seen the most striking change. Since 2006, nonequity partners have been the fastest-growing category in the Am Law 200. During the seven years ending in 2012, firms increased their income partner group by 42 percent, their equity partners by 7.5 percent, and their associates and counsel by 14.9 percent. (In our census we lump associates and counsel together.) As a result, equity partners accounted for 24.7 percent of lawyer head count in 2012, down from 26.8 percent in 2006. Or to express it differently, despite the boom, bust and slow recovery Big Law has weathered since 2006, as a group tThe Am Law 200 has increased the percentage of lawyers who are working on behalf of the owners from 73 to 75 percent. You can think of this as a kind of law firm buy-back strategy.
As leverage has changed, so has the meaning of the title partner. Fully 40 percent are now nonequity. And about the only things they share in common are fixed salaries and a label. As my former colleague Amy Kolz explained two years ago in her report on the wide gap in compensation for nonequity partners, income partners come in at least five varieties:
• Young partners promoted into a final Hunger Games–like tournament where the survivors win equity shares and the losers leave;
• Young partners put on fixed salaries for a couple of years while they adjust to their new status and responsibilities;
• More or less permanent income partners who, like Gregory Owens, don’t have their own business but serve the clients of the firm or a particular partner;
• Lateral partners who during their first years at a firm have guaranteed incomes;
• Former equity partners who, because their performance has slipped or they are nearing retirement, have been put into income status.
Despite their varied circumstances, they share a third quality: They’re regularly blamed by observers and consultants for many undifferentiated firm woes. The current conventional wisdom warns that these lawyers have multiplied like hamsters, don’t work hard enough, occupy sinecures, block the path of ambitious younger lawyers, and generally represent a sentimental approach to law firm management and organization. It’s a damning indictment, yet one that ignores a confounding point: On average, these income partners seem to be rather profitable.
How do the economics work? To answer that, we looked at data from our annual Am Law 100 and 200 reports buttressed by annual surveys conducted by the two leading bankers to law firms, Citibank and Wells Fargo. In addition we interviewed heads of law firms and reviewed internal documents from several firms. On average, the story is a positive one. After accounting for hours billed, salary and overhead, the average income partner appears to contribute $274,074 to his or her firm’s profit pool.
Here’s how we reached that number. From the Wells Fargo survey of law firms we learn that the average nonequity partner billed 1534 hours in 2012. The average hourly rate was $651. Multiplying those two figures yields a gross revenue of $998,634. (Wells Fargo draws its data from roughly 200 participating law firms, including “more than 70 Am Law 100 firms.”) From that gross we subtracted the average compensation for nonequity partners, which was $450,000.
