Friday, February 26, 2010

 

Putting the Equity Back in "Equity Partnership"

We have been following the debate over firms reporting numbers of equity and nonequity partners. Now the debate has erupted into a battle, with NALP caught in the crossfire. (For background, read Vivia Chen's article in The American Lawyer, Above the Law's take, and Business Insider's view.)

It appears that there are two issues: 1) reporting by firms of how many partners they have, broken down into "equity" and "nonequity" categories; and 2) the definition of "equity." The definition is an issue because some firms use the "equity" label for partners whose compensation is mostly or completely fixed and not based on a share of profits.

Everyone gets why organizations like PAR, MCCA, and NAWL want accurate information about how many partners in firms are in the top ranks, having equity and sharing in profits. Law students and lawyers looking for another firm also have obvious interests in knowing what their partnership prospects would be at a particular firm. But what are the law firms' reasons for not wanting to provide the information, and is there some way to accommodate the interests of each side?

One of the firms’ stated reasons for their reluctance (and, of course, we know that not all firms share the same reasons) is that  for small offices, it may be possible for others to figure out who are the nonequity partners, thus violating those partners’ privacy, and perhaps causing clients to question their  competence or billing rates.  A solution for this problem has been suggested: ask firms to report the number of nonequity partners combined with the numbers of other salaried lawyers (counsel, associates) rather than as their own category, to make identification more difficult.  While that would not provide all the information sought by researchers, award bestowers, and job seekers, it would provide at least the most important information regarding equity partners.

Another of the firms’ stated reasons is business privacy, that it is their own business how they compensate their partners.  This is true and they should be able to keep this information private if they wish. As with anyone who asserts privacy, however, there may be lost opportunities (or costs) associated with keeping the curtain closed.  One loss may be the inability to report diversity numbers to groups that track firms’ progress toward inclusiveness. This in turn may make firms less attractive to job seekers, particularly minority job seekers.  In the long run, the cost may be felt in terms of a diminished competitiveness in the war for talent.

The diminished competitiveness could actually be felt sooner if organizations begin publishing data on which firms are providing accurate equity partner data.

An additional effect of publication could be a leveling of the playing field:  right now, firms that have only one type of partner -- equity partners whose compensation is based on profit sharing -- may be at a competitive disadvantage with respect to reported numbers of diverse partners. To the extent that other firms have diverse partners in their nonequity or "equity in name only" ranks, they appear more diverse than perhaps they are when they report equity and nonequity partners as a combined number or fail to distinguish between equity partners who are paid mostly a fixed amount and those who are paid mostly from profits. If a list of "transparent" firms becomes publicly available, look for one-tier firms to rush to get listed.

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