Biglaw, In-House Counsel, Money, Partner Issues, Partner Profits

On ‘Hybrid’ Partners And The Games Law Firms Play

I’ve just celebrated my fourth anniversary working in-house, and I’m now officially out of touch with law firm life.

I thought I knew all the law-firm-partnership tricks. For example, when law students ask at interviews what percentage of firm partners hold equity status, some firms answer: “At this firm, all partners are partners.” That’s true, of course, but tautological; it says nothing about the equity and non-equity ranks.

On the other hand, this non-responsive answer serves a useful purpose. It may help to convince law students (or lateral associates) that they have a real chance at making partner at the firm, even though the equity partnership ranks are tiny and getting thinner every day.

But I recently learned about a new game that law firms play. This one is aimed not at deceiving law students or lateral associates, but rather the granddaddy of law firm rankings: The American Lawyer’s profits per partner calculation.

I thought I knew all the ways law firms could try to mislead The American Lawyer. There’s the possibility of outright lying, of course, and then there’s using funky methodologies that inflate profits per partner from $1 million to $1.8 million for the year 2011. But there’s a new game in town. It may well be widespread, but I heard about it only recently….

Some firms now create so-called “hybrid partners” or “quasi-equity partners.” These folks have part of their salary calculated as a fixed number and part based on the profitability of the firm. You might thus start as a “90 percent fixed, 10 percent equity” partner. Most of your draw is fixed, but the last 10 percent will vary with the profitability of the firm.

Over time, you might become a “50 percent fixed, 50 percent equity” partner, which makes more of your income turn on the firm’s performance.

Eventually, you could become a “10 percent fixed, 90 percent equity” partner, which is tantalizingly close to what “equity partner” historically meant: You can earn more or less than your projected annual income depending on whether the firm hits or misses its projected budget for the year.

Firms apparently create hybrid partners for two reasons: First, firms can let relatively junior partners feel as though they’re progressing up the ranks, because those folks see their equity status increasing over time. But partial equity status simultaneously permits the true equity partners to continue hoarding most of the firm’s wealth.

The second beauty of creating hybrid partners is that this category permits a law firm, if it’s so inclined, to deceive The American Lawyer about the size of the firm’s partnership ranks, and thus the firm’s true “profits per [equity] partner.” If the firm declares all partners who hold even fractional equity interests to be “equity partners,” then the firm’s profits would appear to be widely shared, and profits per partner would appear to be lower. But if the firm declares only Ivory soap partners (those who are more than 99 and 44/100 percent pure) to be “equity partners,” then the firm instantly appears to be more profitable, because fewer “equity partners” appear to be sharing the partnership pie. Voila! The firm moves up in the Am Law PPP rankings, and the managing partner need no longer be ashamed when he runs into his managing-partner buddies at the club.

Am Law itself might view the game I propose as outright lying, since Am Law defines “equity partner” for purposes of the Am Law 100 as “lawyers who get 50%+ of their compensation as equity.” But there are still plenty of ways to game the system around the edges. Firms could, for example, hold partners at the 49% equity level for many years, thus keeping the troops relatively happy while still maximizing reported profits per partner.

Frankly, I’ve never quite understood law firms’ fascination with profits per partner. Firms say they must keep their numbers high to attract lateral partners to the firm. But why does a lateral partner care? Lateral partner candidates might care deeply whether a firm was offering them personally $1 million or $2 million or $3 million per year in projected draw as an enticement. But would a lateral candidate decline an offer to earn $2 million per year simply because the firm’s average profits per partner were only a million five?

And the lopsided distribution of income within partnerships — where the highest-paid partner can receive 24 times the pay of the lowest-paid partners — are so dramatic that averages can be (and are) awfully misleading in this context.

No matter. Just in case the profits per partner numbers were not sufficiently misleading to begin with, firms have now created a new class of partners — hybrid or quasi-equity partners — that will permit firms to game the Am Law rankings yet more effectively.

Next thing you know, law schools will start fudging their post-graduation employment numbers.


Mark Herrmann is the Chief Counsel – Litigation and Global Chief Compliance Officer at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at inhouse@abovethelaw.com.

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