@Andrei Radu @Abbie Whitlock How do law firms keep their salaried/ non-equity partners? I assume that these partners/ managing associates are extremely valuable to law firms and will be hungry to prove themselves to make equity partner. They are not nearly as established in their existing law firm since they don't own equity in it. This makes them ripe candidates to be poached. Outside of purely financial compensation, what are incentives law firms use to keep these individuals happy? I'm struggling to understand why K&E non-equity partners would choose to leave when the firm is so profitable. Is it simply because the path for development into an equity partner is perhaps easier at a different firm, where they would have more opportunities to bring in clients?
Hi
@CharlesT47 that is a great question. The answer to it is that
having an extremely high PEP is a double edged sword: on the one side, it makes existing equity happy very happy and therefore makes it harder for other firms to poach them; on the other, it means it is very difficult to become an equity partner in the first place, which makes NEPs, counsels, and seniors associates more likely to move to another firm. Essentially, to maintain and increase a firm's average PEP, you need to (i) to have a high revenue and profit margin; and (ii) to have a relatively low number of equity partners to split it between. If you want to have a high average PEP, you have an incentive to split the equity pie in the lowest number of slices possible - if Kirkland had double the number of equity partners as a result of promoting more NEPs, this would halve its average PEP. Of course, this would upset current rainmaking equity partners (as it would mean less money goes into their pockets), who would then seek to move to a firm which guards their equity ranks more tightly.
At extremely profitable firms like Kirkland, it is necessarily the case that only a small proportion of extremely talented lawyers will be able to make equity, as a firm will only accept the initial dilutive effect on average PEP if it believes that, a few years down the line, the junior equity partner will bring enough business in to offset the loss. Considering the firm's average PEP is over $9 million now, that is an extremely tall order - very few lawyers are able to build books that are anywhere near that range (for reference, the highest paid partner at
Clifford Chance last year was reportedly earning $6 million per year).
Furthermore, this is not only a skills problem -
there are many extremely qualified lawyers at the NEP stage that could probably build such books but are still never progressed to equity, simply because of lack of opportunity. To generate such immense profits, firms like Kirkland only really target very profitable private capital mandates; and these deals and client relationships are limited in number. As such, you could be an incredibly technically gifted and business-savvy practitioner, but in absence of having played the "political game" within and outside of the firm very well (eg making friends with partners with political clout in the firm, impress the right clients, become the go-to associate for the right partners - whose books you then stand to inherit, being on top of and lucky with your networking so that you remain connected with people who end up in decision-making positions in house, etc), you may still never get promoted.
As a result, at the most profitable US firms, from what I hear estimates are that maybe around 1/3 of people who stay long enough and gun for equity partner will be promoted. The ones that are not may stay on in NEP/Counsel positions (although some firms, like Kirkland, are known for an up-or-out model), go for a senior in house position, or move to a comparatively less profitable firm which will offer them equity.