Now is the time on ATL when we dance — around the subject of money. With just two months left in the year, law firms are focused on collections, associates are focused on bonuses, and partners are focused on profits. Even though money is not the be-all and end-all of law practice, as we have emphasized in these pages before, it’s a topic that people follow — and a topic that we will therefore be covering closely in what remains of 2012.

Earlier this week, the American Lawyer magazine touched upon a topic that doesn’t get as much attention as it should in the world of Biglaw: compensation for non-equity partners. Let’s take a look at Am Law’s findings….

Here’s how the article, by Amy Kolz, begins:

You could call it the last black box. For more than three decades, The American Lawyer has ranked profits per partner at Am Law 200 firms. Parsing and comparing those equity partner paychecks has become routine sport among law firm leaders, consultants, and recruiters. Associate compensation is put under the same microscope — salaries and bonuses appear on news sites and blogs minutes after their announcement or distribution. But compensation for nonequity partners, the fastest-growing cohort in The Am Law 200, has remained largely opaque. Until now.

This is a great opening, and it’s absolutely true that non-equity partner comp is hard to get to the bottom of. But does the article deliver on the promise of clarifying this obscure subject? Let’s keep reading.

Here’s Am Law’s methodology:

Just as we derive a firm’s profits per partner from its net income (we divide that amount by the number of equity partners), we used each firm’s reported nonequity compensation, divided by its total number of nonequity partners, to calculate an average payout per nonequity partner, or PNEP. The range in PNEP results was startling, going from $1.53 million at the high end (Milbank, Tweed, Hadley & McCloy) to $100,000 at the bottom (Vorys, Sater, Seymour and Pease) [see "How the Other Half Lives,"]. What’s more, the relationship between what firms paid their nonequity partners (PNEP) and what they paid their equity partners (PPP) was all over the place, with PNEP spanning from less than a fifth of a firm’s PPP to a number that’s only a bit below it (at Wiley Rein, for example).

Hmm…. While these individual data points are certainly interesting ($100,000 a year for a law firm “partner” — depressing), it seems hard to come up with generalizations or even rankings based on them. And here is why:

There are a half-dozen different names for this cohort—income partners, salary partners, nonshare partners, fixed-dollar partners, contract partners — and the types of lawyers that carry these titles are just as varied. They can include ambitious junior partners on the path to equity partnership, laterals with a short-term fixed-compensation arrangement, senior partners on their way to retirement, partners seeking a predictable income or better lifestyle, or at many firms, some combination of all of the above.

Let a thousand partners bloom? Because “non-equity partner” is essentially a concocted category — made up, in many cases, so firms can look better in the very influential Am Law 100 profit per partner rankings — smart and creative lawyers have come up with a proliferation of approaches to it. And it gets worse (at least for those of us who like clarity as opposed to messiness):

Making matters even more complex, The American Lawyer’s definition of nonequity — any partner earning more than half of his or her compensation on a fixed basis — doesn’t always match firms’ internal classifications. Given such diverse and amorphous definitions, it’s no surprise that a multitude of different compensation systems and pay scales have proliferated for this group of lawyers.

Let’s pause here, because that’s huge. For purposes of this analysis, a non-equity partner is “any partner earning more than half of his or her compensation on a fixed basis.” As a result, the definition includes high-powered and highly paid lateral partners who have guaranteed or contractually specified compensation for a specific period of time at their new firms. These partners wouldn’t really be considered “non-equity” partners in the traditional sense (at least to the extent there is a “tradition” about something so novel), but they count as NEPs for purposes of the Am Law analysis, and their presence significantly skews the compensation figures in some cases.

So who is it that we think of when we think of the traditional “non-equity partner”? Kolz mentions two firms, Kirkland & Ellis and Akin Gump, that take one fairly standard approach: “the junior nonequity partner as an employee.” At K&E, the average payout per non-equity partner (PNEP) clocked in at around $455,000 in 2011. At Akin Gump, according to chairman R. Bruce McLean, these junior non-equity partners earn around $450,000 to $500,000. (These numbers seem about right to me; if you had asked me to peg the comp range for non-equity partners prior to this article, I probably would have said it goes from $350,000 to $600,000, depending on the firm.)

Here is the second big approach to junior non-equity types:

The second type of junior nonequity partner is more of a hybrid. Exemplified by Paul Hastings and several New York–based firms, these junior partners are considered full equity partners by their firms, with the same rights to vote and requirements to contribute capital. While their compensation is largely fixed, for anywhere between one and four years, it’s still quite generous. Paychecks for these ascending partners can range from $650,000 to $1 million in the major markets, according to law firm leaders and recruiters.

“The fixed compensation allows a level of planning for our younger partners who haven’t yet had the benefit of a big [end-of-year] paycheck,” says Greg Nitzkowski, Paul Hastings’s managing partner. His firm uses fixed compensation for the first two years after a lawyer has been elected to the partnership. “I’m one tier below the top [compensation level], but I don’t want to forget what it was like to be a 40-year-old partner struggling to pay a mortgage or afford my kids’ tuition. We’ve tried to make those things easier for our younger partners,” Nitzkowski says.

That’s actually pretty nice. Making partner can carry some costs (such as a buy-in or covering your own health insurance), so giving a new young partner a fixed paycheck helps that partner from a budgeting perspective.

Now let’s turn to the people who qualify as non-equity partners for purposes of the Am Law analysis but wouldn’t conventionally be considered as NEPs:

[L]ateral hiring at Am Law 200 firms almost always skews the PNEP, and its ratio to PPP, higher. Though firms such as Paul Hastings immediately place all lateral partners in their share or point system, most firms offer arriving partners a base guarantee for anywhere between a few months and two or three years, according to recruiters and law firm leaders. These pay packages, which can be completely fixed or can include bonuses earned through benchmarks, almost always qualify the new lateral for nonequity status in the Am Law 200 survey by virtue of our 50 percent rule. And so any addition of senior lateral partners can add tens or even hundreds of thousands of dollars to a firm’s average nonequity payout in a given year, say law firm leaders.

In some cases, these well-paid laterals are considered equity partners at their new firms on day one, with full partnership and voting rights. Weil, Gotshal & Manges, for instance, hired 18 lateral partners into its equity ranks in 2011. And though the firm only pays guaranteed packages for the months remaining in the calendar year that the lateral joins, the sheer number of these fractional additions are enough to artificially raise Weil’s PNEP to $1.3 million, says executive partner Barry Wolf.

So if you thought it was a bit odd to hear about non-equity partners with seven-figure paychecks, no, you’re not crazy. These partners are really pseudo-non-equity partners.

And laterals with contractually dictated compensation aren’t the only folks throwing a wrench into the works when it comes to calculating the true compensation of true non-equity partners. Am Law also notes:

A far smaller subset of well-compensated nonequity ranks at some firms are the elder statesmen. In the twilight of their careers, these partners may be either approaching mandatory retirement, looking to reduce their workload, or simply happy to hand over the reins of equity partnership in exchange for a regular paycheck and the return of their capital. That ­paycheck can be quite steep. Patterson Belknap Webb & Tyler has three nonequity partners who earned a combined $4 million in 2011, an average of $1.3 million each, and 82 percent of its PPP. “Those partners are in a two-year transition to retirement, during which their income is fixed by a formula,” said cochair and managing partner Robert LoBue in an email.

Former senior equity partners who are earning huge paychecks as they ease themselves into retirement? These aren’t the non-equity partners you’re looking for.

Here’s the conclusion to Amy Kolz’s article (which is extremely interesting, and which you should read in full):

[E]xpanding the population of nonequity partners, or the dollars going to them, might not be a bad thing. Law firms may just be moving toward the business model dominant in many other professions, with few owners and workers compensated on the basis of their contribution, says law firm consultant Joel Henning. “Think about what Derek Jeter or A-Rod makes—they’re not owners, but they’re making a market [compensation], or so their agents believe,” he says. “You want to pay people what they’re worth, but that doesn’t mean that they have the owner mentality.” At some firms that can mean a whole lot of money.

That sounds about right. The rise of the non-equity partner is just another aspect of the larger transformation of law firms away from the traditional partner/associate structure — i.e., current owners of the business, and future owners of the business — and towards the model of the large international accounting and consulting firms, which boast a proliferation of positions with different titles, duties, and pay levels.

So, with apologies to Raymond Carver, what do we talk about when we talk about non-equity partners (and their pay)? Unfortunately, due to some inherent issues with methodology, it’s hard to come up with a fixed and solid definition (and attendant rankings).

We may just be stuck with the Justice Potter Stewart approach: when it comes to non-equity partnership, you know it when you see it.

Unlocking the Mystery [American Lawyer]

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