Gender diversity pushes elite UK law firms towards non-equity partnership model, says Cambridge Judge study
Law firms in the UK and many other countries have traditionally been based on a partnership model in which junior lawyers aspire to be made partner and share in the profits.
But in recent years there has been a shift toward non-equity partnership – a salaried partnership that often results in a multi-tiered law firm structure, says a new study co-authored at Cambridge Judge Business School.
This model allows promotions to help retain talent – particularly in certain areas such as mergers and acquisitions (M & A) and corporate law in which competition for expertise is acute – but without the profit-diluting effect of adding too many partners.
The study looks at some of the factors associated with the adoption – or non-adoption – of non-equity partnerships. These factors include profitability per equity partner, compensation disparity among partners, the percentage of lawyers who are associates rather than partners (known as the leverage ratio), gender diversity and the reputation of partners.
The results are not totally as expected, says Judge, particularly the assumption that compensation disparity between the top and bottom of equity partners – which is consistent with a tiered system – would also be associated with adoption of a non-equity partnership system.
Study co-author Dr Thomas Roulet said: “We found that compensation disparity is not a driver toward non-equity partnerships. Our hypothesis was that compensation disparity is a marker of inequality and that non-equity partnership is another marker of inequality, and that they would come together. But what we found is that highly unequal firms in terms of compensation do not trend toward non-equity partnerships.”
The study also found that a higher ratio of women among a firm’s ranked partners has a “positive and significant” effect toward the creation of non-equity partnerships.
One hypothesis is that “diversity within organisations makes them more likely to adopt new practices because of the variety of contexts and backgrounds of their employees,” the study says.
The study notes that creation of non-equity partnerships can allow firms “to increase leverage and often profits” while also enabling them to “frame the practice as fitting with different life choices.”
Profitability per partner makes firms less likely to adopt non-equity partnerships. Study co-author Dr Lionel Paolella commented: “Profitable firms conform to the dominant existing practice, as they do not need to adapt for survival. Non-profitable firms may adopt non-equity partnership in order to avoid further sharing of the profits between partners.”
Firms with a higher leverage ratio of associates to partners tend to stick to equity partnerships. “We might explain this result by the fact that firms with high leverage are focusing on commoditised services and thus have little need for non-equity partnership to retain top talent. Thus, those firms stick to the institutionalised practice of equity partnership,” the study finds.
It discovered that law firms with a higher average reputation of lawyers are less likely to adopt non-equity partnerships. “This can be due to the fact that the existing practice of equity partner is seen as a positive asset that contributed to the higher reputation of its partners, thus making it likely to be maintained,” says the report.
The authors focused on the rise of the new institution of non-equity partnership at the industry level by looking at the demography and population characteristics of law firms – the micro-foundations of the institution, in the terminology of organisational studies.