The Salaried Partner Dilemma: Part III

In Part III of the “The Salaried Partner” series, we outline current best practices for firms exploring partnership tiers. Read Part I and Part II here.

With increasing costs and margin squeeze, maintaining profitability and managing the financial expectations of equity partners has become an increasing challenge. While firms can successfully navigate this transition, research highlights the intricate balance required to manage salaried and equity partners effectively. Below is a short summary of the keys to success, derived from both our consultancy projects and the research.

Keys to success

Provide more clarity on role progression.

If the salaried partner role is intended as a stepping stone to equity partnership, the selection criteria should mirror that of equity partners. However, this does raise the question of its necessity and purpose beyond simply “managing profitability” — a valid aim of course — though as we have seen messaging to the rest of the firm can be a challenge.

For those with the potential to become equity partners, it is crucial to explain why this additional stage is necessary. Embrace those with equity potential, clarifying that the salaried partner role is not an additional hurdle but a step in their progression.

If the salaried role is a permanent category, its purpose must be clearly defined and expectations managed accordingly. However, the research emphasizes the challenges of a “permanent” salaried partner role, where individuals have no realistic path to equity partnership. If this is a permanent category, its purpose must be clearly defined and expectations managed accordingly. Avoid creating a permanent group of dissatisfied “pretend partners.” Transparency and trust are required.

This likely requires a dual-track system, where highflyers are recognized and told they have real potential to join equity. One must manage both tracks carefully to ensure that both “full-time salaried partners” and “future equity partners” feel valued and supported. Providing adequate support and mentoring is essential.

Finally, some firms have introduced a salaried partner position while keeping the possibility of a direct equity path for senior associates, seriously undermining and also devaluing the salaried partner role from the start.

Ensure other career paths are available.

If firms are not promoting their talented young lawyers to salaried partner roles as a retention strategy, they need to provide alternative career paths. This might involve rethinking career development more broadly. Many firms have moved past the phase of simply throwing money at the problem, recognizing that financial incentives alone are insufficient. The focus has shifted to what the firm can offer in terms of professional development.

Understand the impact on profitability in the early years.

Firms need to better understand the ramp-up period for junior partners to determine when they will cease to be dilutive. More importantly, firms must evaluate whether partner candidates have a viable business case. They need to assess if these candidates can develop a business in conjunction with other partners and contribute to the firm’s growth. If not, they will be dilutive, and unless there is a compelling reason to dilute the firm’s profits, such candidates should not be made partners.

Weigh the alternative.

Adjusting the current equity model may be a more straightforward and effective solution than introducing a two-tiered partnership, which comes with its own set of challenges. For low performers, the significant challenge lies in governance. Without the filter of salaried partnership, it can be exceptionally difficult to de-equitize an individual who enters equity but does not meet the required standards.

Although this research does not cover it in detail, many firms have successfully achieved their desired outcomes by modifying the lower equity band only. Specifically, they have implemented an early promotion gateway (often three years) with clearly defined deliverables. This is very useful when a new partner has the non-financial skills required but is not reaching profitability. In such cases, they can be held at that first gate if necessary.

However, without close management and strong leadership, this approach can become a way to delay addressing issues, as their position will simply be frozen.

Find your own way.

Performing a review of your partnership make-up at regular intervals is today’s best practice for firms everywhere. However, there is no one-size-fits-all solution – an open debate is required amongst the equity partners in order to agree the best way forward for each firm. Fundamentally, you should always be asking: is there a sufficient difference between your salaried and equity partners to make a two-tier partnership work, thereby helping your firm to increase profits while managing costs?

Final thoughts

The adoption of partnership hybrid models is on the rise—with a non-equity and equity partnership tier. When implemented correctly and for the right reasons, the benefits can be substantial. However, the challenges and pitfalls only underscore the broader issues that many firms face.

Finding the right balance between developing and retaining associates while making difficult decisions is one of the toughest challenges partners face. During his interview, Stephen Revell quoted a law firm partner who explained, “We understand the need for honesty, but it is also the enemy of retention. If we told all associates whether they stood a chance or not, or how good they were, they’d all leave. Even the good ones would leave.”

The research clearly indicates that avoiding difficult conversations and “kicking the can down the road” is the worst reason for having salaried partners. Additionally, many individuals are drifting into salaried partner roles without asking the right questions or thoroughly investigating their options and career paths.

The more traditional up-or-out model, though ostensibly harsh, provides clarity by informing individuals about their future within the firm. As one respondent explained, “You just say to people, ‘I’m sorry, you’re not going to make it into partnership, and there’s no future for you here in the firm.'” While this approach may seem tough, it is certainly straightforward.

Firms transitioning from the traditional up-or-out model, which emphasizes a sink-or-swim approach, to a curated career model will likely require a significant mindset shift. It is understandable that partners focus on day-to-day “survival,” prioritizing excellent client work and profitability over the longer-term development of future partners. However, it is essential to redefine partner rewards by adopting a more holistic view of “contribution.” This approach should not only consider numerical performance but also emphasize the development of people as much as the quality of client service.

The elite firms we are advising continue to be extremely busy, for many 2024  was one of their most profitable years. We are very confident about the future of the partnership model as long as the mindset of owners are keeping up with the times. The stakes are increasingly high as the key success factors and, hence, the gap between the most and least successful firms increases. “Buckle-up” is the message to corporations – plus the law firms advising them – with a new presidency in the US. For firms navigating this well, profits will increase – with a widening gap, however, between the winners and losers.

For more information on this research please reach out to any of the authors or contact [email protected]. Further materials on this topic are available on the Lexington Consultants website or on the YouTube channel.