The Salaried Partner Dilemma: Part II

This is part II of “The Salaried Partner,” a series which outlines the common challenges experienced by law firms as they grow and explore other partnership structures. Read the introduction to the series in part I. The findings below are based on an IBA survey distributed to almost 200 law firms, asking about their partnership structures and the role of “salaried (non-equity) partners.”

Research findings

In our survey, over three-quarters (77 percent) of respondents say their firm has a salaried partner tier while the rest are equity-only (23 percent). When further broken down by firm type, we get a clear pointer as to where the two-tier model is being adopted.

Out of those firms with salaried partners, the international firms come out top with salaried partners making up more than half of their partnership. About a quarter (26 percent) of the international firms have more salaried than equity partners. They are followed by 24 percent of niche firms where more than half the partnership is salaried, followed by 18 percent of national firms and 11 percent of regional firms. About half of the international and regional firms have 20 percent or less of salaried partners.

Importantly, 35 percent of firms say they are either considering increasing the proportion of salaried partners or have done so recently.

This group is led by national (40 percent) and niche (37 percent) firms, compared to 28 percent of regional and 24 percent of international firms. All types of firms consistently state that the main advantage of the salaried role is that it is a good way to retain their best people by shortening the career pathway and providing vital “test” experience for a possible equity role.

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International aspects are outside the scope of this series, however, the differences are clear:

• National independent firms in Europe have a lower percentage of salaried partners than the survey average;
• India is an interesting market, with many firms relying heavily on the salaried role, in part owing to the closely held equity amongst the remaining “family-owned” elite firms. Although an emerging group of firms are opening equity and decision-making in what has been called “democratizing the law;”
• In Asia-Pacific and South America, the national independent firms often have a much higher ratio of salaried to equity partners;
• Across Africa, the use of salaried partners is higher that Europe, although the international firms in Africa tend to have a lower proportion of SPs;
• International firms in Europe either have a small percentage of SPs or a larger one, but nothing in the middle.

Firms are seeking to create or expand their salaried partner tier for various reasons — from needing to quickly absorb new partners into the firm without damaging profits (which has been a particular issue for many elite firms following the recent high level of growth) to a policy of protecting profits and blocking most from equity. The survey responses cover the whole range.

It is clear from the responses that in many elite firms this is a very live debate – some partners are not yet convinced it is the right approach for “one firm” partnerships where the rallying call is “one for all, and all for one.”  For some, the salaried role is a very efficient way of retaining the best people in the short term while considering their suitability for equity over the longer term. Another compelling reason is that the role provides a very effective training space where aspiring lawyers can experience the perspective of being a partner, while learning the craft while developing new skills such as client-building.

Selection today is more “defensive” and less “strategic” 

The divided opinions over the “reason for” and hence “purpose of” salaried partners, feeds into a lack of clarity over the roles or clear career paths, as seen across the research.

The survey gave respondents a list of the advantages and risks of the two-tier model, to score out of a total of 5 points. From the responses and accompanying comments, more than taking a strategic approach to growth and profitability — which has been predominant — the salaried partner role is today increasingly seen as a “defensive move” to retain talent.

Selection criteria for salaried partners is not reflecting the needs of an equity partners 

The potential for role ambiguity seen throughout the research is only amplified in the responses regarding the selection criteria. The divide between those firms seeing the salaried role as a gateway to equity or, alternatively, a long-term way of keeping good technical lawyers with expertise becomes blurred – many firms lack clarity over such an important issue.  

Respondents were asked for their main criteria for selecting a salaried partner. Given that retention was seen as the primary reason for salaried partners, perhaps it should come as no surprise that the selection focuses more on “technical” skills required in delivering legal services more than the broader entrepreneurial skills required should they then pass into equity. Having said that, the ability to build successful client relations was second in the list of selection criteria.

From the research interviews and survey comments, it is clear that the salaried partner role is creating unintended tensions. These include uncertainty and indecision, where a specific career path was not agreed at the outset, essentially when the salaried partner becomes stuck in a “holding bay.” This can lead to disincentivising an individual at best, or resentment and resignation at worst if left too long.

Some firms are, however, crystal clear on purpose: 29 percent per cent have the same selection criteria for salaried and equity partners. However, 71 percent of survey firms have different selection criteria for salaried and equity partners. The figure varies greatly among firm types, with more than half of niche firms and a third of regional firms having the same selection criteria for both roles. 

That 27 percent of the firms surveyed say that their salaried partners are “reducing profits” points to the very live and practical challenges of a two-tier firm. Furthermore, only 54 percent of firms report that salaried partners are as equally profitable as senior associates, with 31 percent believing they are less profitable (15 percent do not have salaried partners).

Niche firms are the most critical, with 60 percent agreeing that salaried partners are less profitable, even as they have the highest proportion. This sentiment is shared by 40 percent of regional firms, 30 percent of national firms, and 30 percent of international firms. If the primary aim of a two-tier partnership is to increase profitability, it is failing in many firms.

Perhaps this should not be a surprise. Managing the transition into equity partnership while increasing profitability is becoming more complex and although “elite” legal advisors, some firms are still lacking the profitability management approaches and systems required of such major businesses.

Participants explained that post-pandemic, new partners were often promoted to retain talent, sometimes without the necessary rigor. This has resulted in underperformance among some of these new partners and created a bottleneck for the most impressive senior associates. This situation highlights the need for better professional “margin management.”

It would appear that firms are failing to evaluate whether salaried partner candidates have a viable business case and understanding if they can develop profitable work in conjunction with other partners and contribute to the firm’s growth.

Understanding the different financial expectations  

Each firm must understand the financial consequences of their business model and the motivation behind the salaried partner tier. The billable hour requirement for salaried partners will vary between firms, depending on several factors, including profitability targets and the agreed-upon differential between salaried and equity partners.

Again, the research points to different approaches and areas of ambiguity — 24 percent of firms require higher expected billables for equity partners with 52 percent expecting higher numbers for salaried partners.

Associate salary increases are working their way through the system

The survey also highlighted the financial challenges of the salaried partner role. The average salary increase from a senior associate to a salaried partner was 34 percent while the increase from a salaried partner to an equity partner was 39 percent, both presumably leading to a reported reduction in profits.

Striking the right balance is key; the promotion to salaried partner must be sufficiently motivating, but it inevitably impacts profitability. Ensuring that salaried partners generate higher fees and leverage junior staff effectively is crucial, without deleveraging the current model. With the current salary increases for junior lawyers, this margin will ripple through the system, causing  salary compression plus cost inflation.

As we have seen, the salaried partner role should not be a way to delay difficult decisions. It must address specific needs without lessening the prestige of partnership or causing dissatisfaction among the most talented lawyers.

As is often the case within the partnership model, aside from the business logic, it is the “soft” factors that are hardest to solve. While management advantages are clear, the challenges of culture, communication, and leadership were highlighted throughout the research.

Respondents listed the following cultural challenges:

• Avoiding Decisions: Partners rely on their teams to deliver services at a high professional level within tight deadlines, as they try and balance their own financial expectations and personal work-life balance. It is clear that in many firms, the salaried partner role has been an ad-hoc approach to keeping people seen as essential, which was expressed by a number of firms as “kicking the can down the road” or “putting off difficult decisions until later,” without promoting them to full equity partner.
• Pretend Partners: A natural consequence, across firms, is that the salaried partner role can become a place for those lacking the skills or relationship capital to become equity partners, hence creating second-class citizens with no voting rights and the false expectation of “real” partnership.
• Damaging Culture: where the salaried partner role is a “testing ground” into equity the negative cultural impact can be high, encouraging wrong behaviors (“my client”) and competition among the salaried partner cohort, focusing them on personal financial targets rather than the broader benefits to the firm. When pointing to the negative “me first” as opposed to “firm first” behaviors often seen amongst equity partners, firms may be overlooking the negative aspects of the salaried partner role.
• Demotivating: the research again highlights the dangers of the salary partner role placing an additional hurdle and increase to the number of years to partnership. It is clear that this can be demotivating but is also manageable with honest and clear expectations deadlines and expectations setting.

While beyond the scope of this current research, the survey results highlight one final issue which is perhaps the most critical: clients do not distinguish between salaried and equity partners. This finding underscores the importance of maintaining high standards for all partners, as clients perceive them equally. The idea that SPs could be less qualified is a false premise, given the potential for reputational damage. Firms must ensure that all partners, regardless of their status, uphold the firm’s brand and quality.
 
For independent firms, the role descriptions for salaried and equity partners are often the same. However, global firms tend to differentiate these roles significantly. This variation highlights the need for a deeper understanding of different firm strategies and approaches. The survey also suggests that many firms recognize that salary partnership is not a silver bullet, but rather a complex strategy requiring careful implementation.

Stay tuned for part III of “The Salaried Partner Dilemma.”