In the old days, lawyers hoped to make it to partner and reap the benefits of sharing in the profits of a law firm.
Nowadays, it's not that simple.
Most still get paid through profits, but a growing number of them are stuck with just salaries and bonuses along with a non-equity partnership.
The strategy has prevented partners from having to dilute their profit share while adding more lawyers as they grow their firms.
One of the first firms in Los Angeles to catch on to the trend was Latham & Watkins LLP, where 20 percent of its 478 partners are considered non-equity, according to American Lawyer magazine. That distinction has helped Latham retain profitability while growing to become the third-largest revenue-generating firm nationwide, with $1.2 billion in revenue last year.
Among the top 100 U.S. firms, 70 percent have some form of non-equity partnership, said Ward Bower, principal at Altman Weil, a legal consulting firm in Philadelphia.
While the distinction gets lost on most clients, the legal industry began to notice that firms failed to report non-equity partners as true partners.
Firms were "playing games with their numbers" in order to look more profitable, said Blane Prescott, a partner at Hildebrandt International. "The smaller number of equity partners, the higher your profits looked."
In its report, American Lawyer ranks law firms by several measures, including profits per partner. In recent years, a new rank of "compensation per partner" was created to better reflect the actual pay that partners received, including those who were considered non-equity partners.
Using that calculation, Gibson Dunn & Crutcher LLP surpassed Latham last year with $1.5 million per partner, compared with Latham's $1.2 million.
It's debatable whether one financial measure is better than another. But both strategies have helped Latham and Gibson consistently rank among the legal elite.
Per-partner profit numbers historically measure the profitability of a firm in the industry and help in recruiting top law candidates and partners from other firms. Firms want to show "the best possible figures for profits for equity partners," Bower said.
Latham's partners decided about 10 years ago to begin hiring or promoting partners who did not necessarily receive all their compensation from the firm's pool of profits. Those partners have the opportunity to move up to become equity partners, but only if they generate enough revenue.
"We looked at a phenomenon which a lot of firms had to face," said Miles Ruthberg, chairman of the litigation department and a member of the executive committee at Los Angeles-based Latham, which at 1,600 lawyers, is twice the size of Gibson. "The economic realities and pressures are such that firms like ours were asking good lawyers to leave the firm because they did not fit the mold to be equity partner at that time."
In other words, a partner's book of business did not generate enough revenues for the firm to justify sharing its profits with him.
For Latham, thinning its equity ranks has boosted overall profits per partner to $1.4 million, slightly lower than Gibson's $1.5 million, the highest profits-per-partner among Los Angeles-based firms.
Jonathan Layne, co-head of Gibson's corporate transactions practice group, said that non-equity partners provides more flexibility for law firms, since they may retain and hire higher-quality lawyers without giving up more of their profits.
Gibson, however, decided to stay with what it knows. "It's more a function of what we have had has worked well with us, so there hasn't been any driving force to change what has worked well," he said.
Layne said many incoming partners have been attracted to Gibson's collegial culture of having everyone vote on business matters of the firm and share in profits.
"A non-equity track has implications that some don't come to the table on equal footing," he said. "Some candidates through the years have been very attracted to our partnership structure because they like the idea that we're one partnership."
Firms with a higher number of salary-paid lawyers to equity partners are highly leveraged, which allows them to grow more quickly because they can hire more lawyers. But it also puts them at financial risk if all their lawyers are not generating enough revenue.
"Revenue per lawyer is a good measure of the productivity of the lawyers in the firm, on an average basis year to year," Prescott said. "It's the amount of business they're actually performing for the firm. A firm that's highly leveraged tends to have lower revenue per lawyer than a firm that doesn't have leverage."
Gibson's revenue per lawyer of $930,000 is higher than the $805,000 average at Latham.
Ruthberg said the difference in revenue per lawyer is not "material."
"They're a very successful and outstanding law firm," Ruthberg said of Gibson. "They have their way of doing things. And we've had our way of doing things, which has worked well for us."
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