25 September 2019

The article at a glance

Gender diversity, but not compensation disparity, pushes elite UK law firms toward the adoption of “non-equity partnerships”, finds new study co-authored at …

Gender diversity, but not compensation disparity, pushes elite UK law firms toward the adoption of “non-equity partnerships”, finds new study co-authored at Cambridge Judge Business School.

Statue of justice.

Law firms in Britain and many other countries have traditionally been based on a partnership model, in which junior lawyers aspire to be made “partner” and thus share in part of the firm’s profits.

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. 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 decision to abandon or reproduce the practice of equity partnership is crucial for a large majority of law firms, to attract and retain talent but also with regards to how profits are shared,” says a new study co-authored at Cambridge Judge Business School.

The study forthcoming in the journal Research in the Sociology of Organizations 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, 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.

Thomas Roulet
Dr Thomas Roulet

“We found that compensation disparity is not a driver” toward non-equity partnerships, said study co-author Thomas Roulet of Cambridge Judge. “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.”

Among other findings, the study found that a higher ratio of women among a firm’s ranked partners (based on the legal directory Chambers and 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. “Profitable firms conform to the dominant existing practice, as they do not need to adapt for survival,” the paper says. “Non-profitable firms may adopt non-equity partnership in order to avoid further sharing of the profits between partners.”

Lionel Paolella
Dr Lionel Paolella

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 found 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.”

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.

The study built a dataset capturing the characteristics of the top 100 UK law firms for the period 2000-2016, based on rankings by the legal directory Chambers and Partners, including data on the reputation of lawyers in eight practice areas: competition, tax, litigation, employment, corporate, intellectual property, real estate and bankruptcy. The study – entitled “Up or Aside? Micro-foundations of Institutional Change in the Career Structure of UK Elite Law Firms” – is co-authored by Thomas Roulet, University Senior Lecturer in Organisation Theory & Information Systems at Cambridge Judge Business School; Lionel Paolella, University Senior Lecturer in Strategy & Organisation at Cambridge Judge Business School; Claudia Gabbioneta at Newcastle University Business School; and Daniel Muzio of York University.