With Cleary Gottlieb Steen & Hamilton moving to a two-tier partnership structure this month, the latest in a line of recent converts, the question becomes what comes next for the dwindling number of major firms that don’t have a nonequity tier. At what point do tradition and culture yield to change and progression?
Single-tier partnership firms may now be at a competitive disadvantage with peers because they don’t have the same flexibility in hiring talent and lateral groups and in the promotion of senior associates, industry observers say.
Still, several firms in the single-tier crowd appear to be using the structure to enhance their reputation and culture.
In the Am Law 100, there are about 13 firms that don’t have a nonequity tier. They include Skadden, Arps, Slate, Meagher & Flom; Ropes & Gray; Jones Day; Davis, Polk & Wardwell; Sullivan & Cromwell; Covington & Burling; Debevoise & Plimpton; Arnold & Porter Kaye Scholer; Wachtell, Lipton, Rosen & Katz; Susman Godfrey; Williams & Connolly; Schulte Roth & Zabel; and Ballard Spahr.
Upper Hand in Talent?
Recruiting and retaining senior associates—that gold mine of Big Law leverage—could now be challenging to single-tier firms relative to their multi-tier counterparts, noted Kent Zimmermann, a veteran law firm consultant with Zeughauser Group.
“The single-tier firms need to adjust and be flexible in order to achieve the benefits that some other firms (multi-tier) have had in retaining senior associates and recruiting on the lateral market,” he said. “They also need to be flexible in stretching out how long they can keep people who are not likely to become equity. There are several ways this has been done historically, but they will have to be mindful of competing against firms that have more flexibility.”
Lateral recruiting is another potential competitive advantage for two-tier firms. In order to get top laterals, firms need flexibility on compensation, as well as flexibility on where and how they couch potential laterals once they arrive. One lateral is good. A fully functional, well-oiled machine of a team is better.
Evan Parker, data analytics expert, legal industry consultant and founder of Parker Analytics, said as the relative importance of growing via lateral acquisition increases, those firms with less flexibility on where to put some of those joiners may see limited growth. That’s especially the case when considering lateral group hires.
“As a managing partner, you are thinking about how to grow your firm. Groups and teams are increasingly moving around, and sometimes laterals want to move with people they have worked with and believe are great. But the firm may not be able to make all of them equity partners, so the firm could lose them all,” Parker said.
Cleary managing partner Michael Gerstenzang told Law.com last week that the firm had encountered situations where a group wanted to move to the firm, but the partnership didn’t have options available for some of the potential candidates. He said it was “unclear how they would fit into our system if we didn’t have a comparable category.”
Meanwhile, in an era of government attorney churn, some single-tier firms may be losing out on former prosecutor candidates who don’t immediately have business.
“What we’ve seen over the years is single-tier partnerships being quite hesitant to bring in an investment hire from the government and make them an equity partner off the bat, unless they were a very senior, very notable person in the government,” Macrae recruiter Lauren Drake told Law.com in August. “We’ve seen firms lose out many times on very strong candidates that they were very interested in to firms that have a two-tier partnership.”
Culture and Profits
“Culture” is the word often used when explaining why it doesn’t make sense for some firms to convert to a multi-tier partnership, noted Zimmermann.
But what part of their culture are they referring to?
“It is important to be specific about which parts of that culture are important to the firm. If it is a culture of excellence and high performance, it is often necessary to determine to what extent the firm needs to be more profitable (with a multi-tier system being a potential driver of increased profitability) to pay the high-performing people who drive that culture,” he said.
He said having more flexibility on compensation “is necessary to continue to maintain a culture of excellence in a market where competitors get more profitable and the market rises over time.”
“Those firms that make the multi-tier system work well tend to have a commitment to a high-performance culture and considerable discipline in managing to it,” he added.
Still, some of the most profitable law firms have retained a single tier. Some credit that to their culture for their excellence.
“We are single tier and are not considering moving away from that,” said Wachtell co-chairs Andy Nussbaum and Bill Savitt in an interview in July. “We are lockstep [partner compensation] as well and are not considering changing that either. We understand the economics that might cause other firms to adopt a nonequity approach, but we think that approach entails trade-offs for firm culture and client service that are inconsistent with our philosophy.”
Another Option?
Law firms like Wachtell and others in the high-echelon of PEP rankings are using the single-tier reputation to their advantage.
“Many still view one-tier partnership with a certain level of prestige,” said Dan Binstock, partner and recruiter at Garrison. “And there is something highly exclusive about it. This is even though more and more firms are adding additional tiers.”
He said firms can create a certain level of prestige and adequately compensate laterals who join as something other than an equity partner if they are willing to be a bit “creative.”
“More aggressive compensation packages or external facing titles that serve primarily marketing purposes are ways that firms that want to remain in the single tier can help overcome that,” he said. “But, at the end of the day, some people are dead set on their title starting with a ‘P,’ and that is a driver as to why we are seeing this change in the market.“