By hunterdt - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=31826004

This is not just something that we can blame on "the Millennials." 

For the past 20 years, partners from law firms of all sizes, in almost every part of the world, frequently have told me that they can't understand why so many of their best associates and non-equity partners decline the offer of equity partnership.

These younger lawyers often express their reluctance in terms such as:

  • I can't afford to buy my interest in the firm.
  • I don't want to be saddled with the financial liability.
  • I will actually make less as an equity partner than I make now as an associate.

Each of these comments, and ones like them, usually are indicators of deeper issues in the governance, succession planning, and lawyer compensation structures in the firm. They also can signify a serious lack of confidence not in the firm's future necessarily, but in a lawyer's individual future in that firm.

The decision to accept the potential rewards -- and, yes, the risks -- of partnership is, as it has always been, basically an individual business decision. There are a number of reasons why some law firms fail to state a convincing business case for equity partnership. They appear across the range of corporate structures of law firms, from general partnerships to limited liability companies, and everything in-between. However, most frequently they trace back to an unaddressed issue in the firm's governance or compensation structures. For example:

  • When otherwise successful young lawyers decline equity partnership (and, in many cases, soon thereafter leave the firm), the most common reason is the requirement for them to pay an unrealistically burdensome amount for their ownership interest. This most frequently happens when the firm uses a traditional capitalization method that requires a new partner to buy his or her proportionate interest at the full value of the firm. This is one of the main reasons why an increasing percentage of firms of all sizes are adopting "easy in / easy out" capital requirements, which usually require only a nominal or partial cash payment to buy into the partnership or other corporate structure.
  • Concerns about financial risk usually point to ineffective management styles and governance structures in the partnership, which can range from autocracy to chaos. 
  • Younger lawyers who express reluctance to us about wanting to become a partner often point to what they perceive to be poor decisions poorly implemented.
  • The risk of a pay inversion phenomenon -- by which a new equity partner is likely to make less cash compensation than he or she did as a non-equity partner or senior associate -- occurs most frequently in two types of situations:

In many firms with traditional capitalization requirements for new partners, new equity partners may pay for their equity by deductions from their pay. During the first few years of equity partnership, this sometimes can push their their take-home pay before what they had received before becoming an equity partner.

The firm operates two (or with non-equity partners, three) separate compensation systems that are not integrated into a consistent, steady upward path to higher compensation. The differences in the policies, rules, and structures of an associate compensation system and a partner compensation system can sometimes mean that becoming an equity partner is a "leap of faith" to a new compensation environment, in which a new equity partner might receive no significant raise in compensation -- or even a slight decrease -- but must assume significant additional responsibility. This frequently happens when the associate compensation structure is based primarily on professional experience or length of service in the firm, and the partner compensation is heavily based on a partner's individual financial performance.

If you have noticed that your firm's younger lawyers are not terribly enthusiastic about becoming an equity partner, it might be due to more than just "Millennial angst." There could be issues in your firm's governance and compensation structures that are working against your efforts to develop, retain, and promote your best lawyers. Pay attention to this now if you want your firm to have a future in a profession in which the toughest competition has become the competition for the best legal talent.

Norman Clark

 

We offer two fast, highly cost-effective services that can diagnose these subtle underlying problems in your firm before they fester into a major crisis. The Walker Clark Governance Review a comprehensive diagnostic of your current governance and decision-making structures, policies, procedures, and actual practices, with practical recommendations that will produce the best measurable results for a reasonable investment of partner time, attention, and resources. Our Partner Compensation Review identifies the strengths and risks that could affect the stability of your partnership and your firm's current and future financial performance. Both of these services are especially designed for the special economic and professional dynamics of small and midsize law firms.