What are the types of law firm partnership?

Traditionally, law firms have been run by partnerships – a group of senior lawyers who put their own money into the firm in return for a share of the profits. However, in the modern legal profession there are many different types of partnership, with huge variety in terms of how firms are structured.

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The type of partnership at a firm should be an important factor for any aspiring lawyer. It will have an impact on the career paths open to you and is also a good indicator of what a firm’s culture – and day-to-day life in the office – will be like. From an applicant’s perspective, understanding how a firm is structured can ultimately help you to impress in an interview.

The legal profession has a reputation for being slow to embrace change, which is reflected by firms’ widespread use of the traditional ‘lockstep’ partnership model. However, increasing demands for better value for money for clients, greater competition for work, competition to attract and retain talent, as well as the influence of US firms, which work very differently, have seen more organisations modify or depart from this approach.

Below we explain the two broadly opposed types of law firm partnership and explore some variations within each, with insights provided by Hanh Nguyen, partner and restructuring and insolvency specialist at Charles Russell Speechlys.

Lockstep

The lockstep model is the most widely used among firms in both the UK and the US. In this system, equity partners’ profit shares increase in line with their seniority within the firm (ie, how long they have worked there).

This means that all equity partners who joined the firm in the same year will be paid the same, all seventh-year associates are paid the same and so on, due to automatic annual pay increases.

Strictly speaking, the lockstep model applies only to equity partners, but some lockstep firms apply the system to salaried partners and associates too.

Pros

The lockstep model creates collegiality, stability and cohesion, as well as loyalty, by placing emphasis on group achievement and teamwork rather than competition between lawyers at the same firm. “A lockstep model provides certainty in terms of partner progression,” explains Hanh. “A partner will know what his or her remuneration will be depending on their seniority at the firm. The pre-established criteria for remuneration also arguably ensures greater transparency and emphasises the sense of sharing and support between partners – and the gains and benefits from diversifying opportunities and spreading risk. In theory, a lockstep model should create a more collegiate culture in which lawyers pursue the firm’s best interests rather than their own, while also rewarding longevity and loyalty, affording greater security to partners.”

Cons

The lockstep model fails to link reward with individual performance, which critics believe encourages inefficiency and unfair situations where lesser performers can ‘coast’ on the greater contributions of others. “Firms using a traditional lockstep system lack the flexibility to deal with underperforming partners as well as high performing partners irrespective of their seniority,” explains Hanh. “Lockstep assumes that senior partners generate more for the business than junior partners and fails to properly account for the speedy progress of higher performing partners.”

Modified lockstep – merit-based pay

Many top organisations, including magic circle firm Slaughter and May, have continued to use a lockstep model, believing that its benefits far outweigh its drawbacks when it comes to a firm’s overall performance and long-term health.

However, particularly since the financial crisis of the late 2000s, which put increased pressure on commercial lawyers and their clients, some firms, including magic circle firm Linklaters LLP, have modified their lockstep arrangements to include an element of performance-based remuneration.

“Market pressure certainly has an impact,” explains Hanh. “Firms have to pay attention to what their competitors are doing. The increase in competition in London from, for example, US firms which are eager to reward individual performance and has influenced some firms’ approach.”

In many cases firms have a bonus system as an extra form of incentive, although even this may be based on the firm’s overall performance that year, rather than tied to the performance of the individual. Nonetheless, lockstep proponents argue that the reward of achieving partnership is more than enough of an incentive for good performance among the types of people that they employ.

Crucially, whether you are in a lockstep or merit-based system can have a direct effect on your salary and working environment when you qualify as a solicitor. Firms’ reward systems vary, but firms including Addleshaw Goddard, Ashurst, CMS CMS, Fieldfisher, Pinsent Masons, Simmons & Simmons, Stephenson Harwood and, more recently, Linklaters have all shifted their remuneration models for associates from a post-qualification experience system to merit-based pay.

As Hanh explains: “Arrangements depend on the culture of the firm and the type of people it is trying to attract to the partnership, which will of course also be affected by what competitors are doing. A key benefit of a merit-based system is that it affords greater flexibility to allow partners to move up and down within the reward structure. Such a system enables partners looking to retire from their roles in helping to run the firm to continue to fit within the structure and remain an important part of the firm, rather than being forced out due to the disparity between what they can deliver as fee earners and what they draw. In this way, a merit-based system can create a more elegant yet proportionate structure.”

Although many firms now use a form of merit-based reward, this does not illustrate the full extent to which it is possible to depart entirely from lockstep.

Eat what you kill

A colourful phrase to describe a pay model that is the complete opposite of the traditional lockstep system.

Firms with an ‘eat what you kill’ approach base their lawyers’ compensation on the revenue that each individual generates. Often, this entails the use of a formula to account for the firm’s overheads, with partners sharing the costs of running the firm, but then splitting the remaining profits based on performance.

In this model, a firm may be more accurately described as a costs-sharing arrangement between individuals rather than a partnership.

Pros

The ‘eat what you kill’ system certainly rewards high-achieving individuals and keeps them happy, while it may also suit firms that hire a lot of partners laterally, as such partnerships will not have developed organically, with the accompanying working relationships and trust that this entails. It also places all the emphasis on performance, which should in theory ensure that all a firm’s lawyers work hard to pull their weight, thus boosting the financial health of the firm as well its reputation among clients.

Not everyone is a team player, so an ‘eat what you kill’ model should get the best out of lawyers who happen to be competitive and individualistic. A purely merit-based model can also benefit a firm’s cashflow, as it incentivises partners to ensure that clients pay up in a timely manner – after all, the partners don’t get paid until they have received a client’s fee.

Cons

The system may work to the detriment of a firm’s cohesion and long-term stability. Purely merit-based models have been criticised as too volatile, with a good example being the collapse of Dewey & Leboeuf in 2012, which operated a pure merit-based partner remuneration model.

Eat what you kill doesn’t account for essential functions such as referrals between a firm’s lawyers, as there is no incentive to encourage this behaviour, while it also punishes those lawyers who engage in vital work for the development of the firm, such as those who take up management or training roles.

Smaller partnerships – the ‘monarch’ structure

The monarch system is used by firms in which one lawyer has clear seniority over all the others and sets the level of remuneration for all other lawyers at that firm each year. This suits smaller partnerships where one lawyer is the original and main generator of business, which can suit the firm’s other lawyers because they earn more under this system than they would if relying only on the work they bring in themselves.

Pros

The monarch system can work well when the senior lawyer (or monarch) is a reasonable and benevolent leader – good management skills are therefore important. When income is shared fairly and rewards and expectations are made clear, the monarch model can be a viable way of operating for smaller firms.

Cons

If one or more of a firm’s junior lawyers develops into a rainmaker in their own right, the model will come under strain. This can lead to departures from the firm, particularly if the original senior lawyer is not willing to share the throne, which may put the long-term profitability of the firm at risk.

Looking ahead: are partnerships giving way to the stock market?

In some quarters, the traditional law firm partnership model is increasingly seen as unsuitable for today’s economic conditions, with listing on the stock market an attractive corporate alternative for large firms.

Floating on the London Stock Exchange (LSE) has become an increasingly attractive option for firms, with regional group Knights among those to take advantage of the faster growth opportunities provided by opening a firm up to investors such as private equity funds. Knights has now made 11 acquisitions since its initial public offering (IPO) in 2018, with investors powering the group’s rapid expansion.

In 2015 Gateley Legal became the first firm to list on the LSE. However, the UK’s largest listed law firm is DWF which floated in 2019. There are still very few firms listed on the stock exchange but despite the turbulence of the past two years, listed firms saw “strong organic growth returning”. Speaking to The Law Gazette, Andrew Simms, head of research at investment bank Arden Partners, adds that “the share prices of the legal firms have also recovered and outperformed the stock market over the past six months, providing good validation of the investment case for this sector”.

That said, law firms are still not racing each other to list, with law firm management keen to maintain control. The Law Gazette argued that “A law firm’s most valuable assets are its staff, and in order for an IPO to be successful, care must be taken to resolve conflicts within the workforce and cultivate new career paths for the junior end of the profession”.

Why should you consider firms’ partnership structures when applying for a training contract?

The type of partnership a firm has is an important factor to consider when considering making an application. “The form of remuneration model can impact on the culture of the firm and therefore the experience of trainees and associates,” explains Hanh. “If candidates want to succeed at a firm and stay there in the long term, they will need to be prepared to embrace the culture because it will determine how they progress. Candidates should consider which culture will meet their career aspirations.”

A firm’s choice of reward structure could also have an impact on the quality of training that trainees receive. “The nature of the particular model could dictate partner behaviour and the work more junior members are going to get,” warns Hanh. “Working as a junior at a firm that rewards a more individual approach may necessitate getting on the right side of the right partners to get the work you want. That must be true to some extent in any firm, but I imagine it is more acute in ‘eat what you kill’ practices. It would probably also impact on performance reviews and therefore qualification and promotion prospects. The hours expectation on juniors is always higher at an ‘eat what you kill’ firm, as the associates are – to a degree – commodities for the partner to drive hard to earn more and get rewarded more. That is not necessarily a negative, but is an example of how the remuneration system will have a direct affect”.

Make sure that you take a firm’s partnership model into account when deciding which type of career path and day-to-day working atmosphere is best for you.

Olivia Partridge is the content producer at LawCareers.Net.