Les Misérables: Second-tier Partners in the German Legal Market

Two-tier partnerships are bursting at the seams: Firms are under pressure to hold on to talent: Junior lawyers are disenchanted with partnership: US firms are de-equitizing their under-performing partners.

The problem

The two-tier model was supposed to allow firms to keep the good people while controlling the pot (<link http: www.repository.law.indiana.edu cgi _blank external-link-new-window external link in new>Henderson 2006), but as we all know, there is no such thing as a free lunch…and the haphazard formation of the second-tier has resulted in a group of non-equity partners called “Les Misérables”. By changing the way law firms regard non-equity partners and by instigating an appropriate career program, firms can realise the untapped potential of the second-tier. Furthermore, as partnership is no longer in vogue (see for example a <link https: www.lawgazette.co.uk people roundtable-junior-lawyers _blank external-link-new-window external link in new>junior lawyer Roundtable) and law firms are under pressure to establish “alternative” career paths, the second-tier is here to stay.  

Non-equity partners: a rose by any other name?

Salaried partner, fixed-share partner, staff-partner, service partner, national partner and even Counsel: Non-equity partners go by many names. The pre-fix “non” means “not” (non-alcoholic), “a failure to do something” (non-delivery) or “not good or exciting” (non-event). Thus it seems that a non-equity partner is defined by what he (or she) is not. Or alternatively, “a law firm partner is everything a….non-equity partner is not: harder working, more committed, more clients, fewer problems, fewer excuses, more ambition, better interpersonal skills, invested” (<link http: www.bcgsearch.com article what-law-firm-titles-mean-of-counsel-non-equity-partner-equity-partner-explained _blank external-link-new-window external link in new>BCG Attorney Search).

Would non-equity partners be more highly regarded if they held a different title? Possibly, but the problem lies deeper than a mere title. Unfortunate as the word “non” may be, we will use the term “non-equity partner” to denote, in a rather simplified way, those partners operating in the second-tier of law firms who do not participate fully in the management and profits of the firm - although some firms have muddied even this distinction.

Non-equity Purgatory

According to an anonymous survey of 300 US lawyers carried out by <link https: www.law360.com articles nonequity-partners-the-most-miserable-attys-in-your-firm _blank external-link-new-window external link in new>Law360, “non-equity partners are the most miserable attorneys in your firm”. They are 12% less satisfied with their law firm than other lawyers and they reported the lowest levels of contentment. So why are they so miserable?

Initially, there is the simple fact that in an organisation which is highly competitive and performance driven, there is no prize for coming second. One cannot underestimate the demoralizing effect of running the partnership race only to be told that the firm can only offer you a non-equity position. Like Tantalus’ eternal punishment, a non-equity partner may sit at the feast, but cannot eat. Those in non-equity positions describe how dispiriting it is to be left in “non-equity purgatory” (see <link http: www.lawpracticetoday.org article avoid-non-equity-purgatory _blank external-link-new-window external link in new>Law Practice Today). Unlike real purgatory however, there is no guarantee that, having rid yourself of your weaknesses, you will make it into partnership heaven.

What exactly does it mean, to be a non-equity partner? In some firms it is used as a stepping stone to partnership, for others it is a means of putting lawyers out to pasture. Worse however, are firms that use it as both a stepping stone and a final career step. The lack of certainty over the second-tier career structure further depresses the already despondent non-equity partner. Firms who wish to use non-equity as a stepping stone (which of course has its advantages vis-à-vis lateral hires) should create a distinct “pre-partner” track. Firms who wish for the second-tier to be an alternative to partnership need to start writing a career plan (with clear criteria and processes) for such positions.

Non-equity as the By-Product of Partnership

Non-equity is seen by opponents of the two-tier model as a “dumping ground for lawyers with serious weaknesses, most often relating to significant personality problems or quality issues” (<link http: www.bcgsearch.com article benefits-and-drawbacks-of-two-tier-partnerships-in-law-firms _blank external-link-new-window external link in new>BCG Attorney Search). Non-equity partners have been described as those on secret probation or “book worms without charisma” (<link http: jomati.com newfiles _blank external-link-new-window external link in new>Tromans and Williams 2006). This negativity arises when non-equity partners are seen as the fall-out from the partnership election process. The overriding assumption is that those who do not become partner are simply not good enough: an undesired consequence of the partnership process. The up-or-out system is exclusive and dynamic as lawyers both join and leave the system on a yearly basis. Once “outside” of the system however, you remain an outsider, even if you stay with the firm. In an ideal world, with state-of-the-art performance review techniques, firms should be in a position to ensure that only those candidates who are 99% sure to become partner enter the race in the first place – there should be no fall out.

What can be done about it?

Non-equity must be developed into a career path in its own right. Firms need to be crystal clear about which second-tier positions a firm can offer, what these positions mean, what role they play in the firm and what the criteria is for achieving these positions. Dr Astrid Arndt from Hengeler Müller describes this as an “Internal Branding” concept: whereby the role is promoted within the organisation. She argues that HR teams are well positioned to emphasise the value and importance of non-equity roles. We spend time defining what we expect from our partners (even if this is not as openly communicated as it should be) but what about our non-equity partners? At a time when they may feel they have reached the end of the road, it is important to motivate them to continue to develop.  Career plateauing is nothing new for HR advisers and many organisations have developed multiple parallel career ladders – the key to their success however, is in how they are managed: clear job titles, criteria, and open communication.

Inconsequential Parenting or You Get What You Tolerate

In today’s competitive environment, partners must be business entrepreneurs, legal technicians, service champions and inspirational leaders. They cannot be spread out along the spectrum of equity and non-equity according to their entrepreneurial skills or work-life balance wishes. Allowing “non” partners to stick around is an indication that a firm can’t, or won’t, sort the wheat from the chaff. It isn’t easy to let the good people go and firms will testify that you have to “be ruthless about who makes equity partner” (see <link http: www.legalweek.com sites legalweek you-have-to-be-ruthless-about-who-makes-equity-partner-shearman-gambles-on-non-equity-partners _blank external-link-new-window external link in new>Shearman and Sterling).  Opponents of the two-tier model will argue that non-equity partners damage the firm’s brand. When times are tough, the non-equity layer will often be the first to go. Law firms in the US are already purging the non-equity ranks – seen as “a class that has been allowed to grow larger than current economics and likely future demand can justify” (<link http: www.altmanweil.com dir_docs resource _blank external-link-new-window external link in new>Altman Weil).

If non-equity is seen as the result of an firm’s inability to say “no”, or failure to follow through on promises to promote or remove non-equity partners, then it should come as no surprise that it is viewed both internally and externally as a negative phenomenon. Engaging with the second-tier can dispel this negativity. Their importance to the firm’s ecosystem must be expressed both internally and externally. Academic studies (see for example those by <link http: www.tandfonline.com doi abs _blank external-link-new-window external link in new>Susana Lopes or <link http: eureka.sbs.ox.ac.uk _blank external-link-new-window external link in new>Michael Smets) confirm that not only are “B-Players” essential for a firm’s survival, but that new career paths can work in harmony with the traditional up-or-out system to enhance firm innovation. Re-framing “non” partners as something positive, whilst making them feel part of the system is essential for their motivation. Furthermore, giving long-term employees scope for self-development and skills growth will motivate them to continue. When the job itself is good enough, the promotion is less important.

Cloak and Dagger

Law firms are, of course, entitled to maintain a degree of flexibility when managing the partnership election process, but most firms sacrifice transparency to this end. Unfortunately the average election more closely resembles an Agatha Christie novel, than a modern-day promotion system. One would expect basic information to be communicated to all lawyers from the outset; (1) Partnership prospects: How many partners will be made up, when, in which practice groups; and (2) Partnership process: What is the criteria (not just the candidate’s personal and business case, but also the firm’s business case – see Hartung, Karrierewege und Partnerwerdung from Kanzleimanagement in der Praxis, 2015), what is the process, when do the final elections take place, what happens if a candidate is unsuccessful. More often than not, candidates already in the process are left with equivocal promises: “perhaps in 2 years’ time, but we can’t promise”. Not only does this lead to mistrust vis-a-vis the budding partners, but undermines how the firm is viewed by associates. Millenials quite rightly want to know if partnership is a reasonable prospect, when and on what terms (see <link http: www.bucerius-education.de home news-termine blog artikel what-tomorrows-lawyers-want-what-law-firms-would-look-like-if-generation-y-were-in-charge _blank external-link-new-window external link in new>What Tomorrow’s Lawyers Want). “Maybe” is not the answer they are looking for. Expectations must be clarified and an open and honest dialogue created.

Professional service firms such as McKinsey also focus on associates’ exit from the firm. Knowing that not all associates can be made partner, they invest significant resources in ensuring that employees have a better or more suitable job to go to, and ensuring that the relationship with the firm continues to be positive. Investing in what takes place outside of the up-or-out system pays dividends when it comes to generating future work and growing the firm’s network.

How do you solve a problem like non-equity?

As described in Karrierewege und Partnerwerdung the non-equity problem is the result of a classic, text-book conflict situation and there is no obvious best practice on how to solve it. The advice, given at that time in relation to the position of Counsel, still holds true and can equally be applied to non-equity partners, but with non-equity partners the change in perspective is crucial. Non-equity partners need to be re-framed as complementary to the partnership, existing as the primary product of their own system (not some undesired fall-out of the partnership process). Whilst non-equity remains a “non” role, it will remain merely an exception to the up-or-out rule, and our “les Misérables” will persist.

Initial release: <link file:664 download file>Deutscher AnwaltSpiegel, Edition 13 // 28. Juni 2017 (in German)


Emma Ziercke & Markus Hartung


Der "Newsletter der Bucerius Law School" informiert ca. zweimonatlich über Neuigkeiten aus der Bucerius Law School und Termine.