With more and more law firms reducing their equity partner ratios, Gerard Starkey speaks to leading practices about their conflicting views on the trend and asks how they can avoid mutiny in the ranks of unhappy 'up and comers'

For disgruntled lawyers increasingly worried about whether they will ever join the hallowed ranks of their firm's equity partnership, DWF and Wragge & Co are helpful case studies on the sometimes polarised attitudes of legal sector employers.

DWF has gatecrashed the UK top 20 following a spurt of mergers, including the pre-pack purchase of Cobbetts, but it has the lowest equity partner proportion of any firm in the top 50. Out of an average partner number last year of 285, only 59 held equity, just 21% of the partnership.

"It's all down to contribution, not ratio," says DWF managing partner Andrew Leaitherland. "It is important that equity is aspirational but it's also important that people have clarity as to what they need to achieve to get there."

Defending the merits of his firm's approach (none of the 67 Cobbetts partners to join DWF in February entered the equity), Leaitherland asks: what other law firm has doubled its revenues in two years?

On the other side of the argument sits Wragge & Co, the Birmingham-based firm that operates a 100 per cent equity partnership model. Wragges senior partner Quentin Poole says: "The all-equity model sends a strong message about commitment to quality. In other words, as soon as you start having a large number of salaried or fixed-share partners, there's a risk it becomes all too easy to bring in too many."

He adds: "I accept and understand the argument that it helps with recruitment. But there is a danger of it becoming a slippery slope and too many could be admitted to the partnership who may not be up to the partner badge. Then you run the risk of a dip in quality with some partners not up to the standard one might expect." 

At a more exalted level, the Wragges argument clearly still has resonance among the magic circle firms, which have – so far, at least – resisted the broader sector trend for a shrinking proportion of equity partners. Indeed, they posted a collective rise in equity partner proportions from 81% in 2005-06 to 85% in 2012-13. 

But elsewhere, the pressure on partner profits caused by the global financial crisis has led many firms to pull up the equity drawbridge, meaning younger lawyers face longer waits for partnership while the proportion of equity partners in the top 20 as a whole has fallen 12% over the past seven years to 59% of the total.

Less to go around

As the results for this year's Legal Week Top 50 have shown, organic growth has been elusive for many firms, and, while revenues may have edged up, profits per equity partner (PEP) among the group remained flat year-on-year. 

In fact, the trend over the past five years has been of PEP in decline. Many firms, including Clifford Chance, Ashurst, Pinsent Masons, CMS Cameron McKenna and Berwin Leighton Paisner, have suffered double-digit drops in profits since 2007-08 as corporate clients grapple with an economic landscape redrawn by the financial crash. 

So with fewer profits to be shared out, it is perhaps unsurprising that many firms have decided to shore up PEP levels by simply cutting the number of recipients – even though it will be galling for hard-working 'up-and-comers'.

Tony Williams (pictured), former Clifford Chance managing partner and now legal consultant at Jomati, says: "As we have seen from the recent set of results top lines haven't been growing much, and therefore firms have to manage costs more carefully. This includes managing equity more tightly.

"Since the downturn, firms have been managing their partnerships in a variety of ways. They have been actively reducing the number of equity members to protect PEP." 

In fact, Williams believes that if purely taking UK-based partners into account, the cut would be starker still because of the preference of internationally expansive firms to initially appoint senior lawyers when setting up bases overseas. 

Of course there are exceptions to every rule, and Linklaters and Withers are two firms to have increased the relative size of their equity partnerships. 

But one City-based partner says another method being employed by those seen to be expanding their equity partnerships is to increase the spread of equity between the top and bottom. 

"By doing this, senior partners are largely unaffected, and junior partners are at risk for their profits rather than luxuriating in the security of a fixed share, which in some firms has been a more lucrative place to be in recent years," he says.

Yet this theory does not apply to Linklaters or Withers. At the end of the 2007-08 financial year, Linklaters posted an equity spread of £725,000 to £1.8m, while last year it registered a spread of £663,000 to £1.66m. In 2008, the firm set in motion plans to move towards an all-equity partnership by absorbing its salaried rank of partners into the equity – a process it is in the middle of completing.

Chop and change

Other than Wragges, with its all-equity model, all firms in the top 30 have seen fluctuations in their equity partner to partner ratios, none more so than CMS. In the past decade, the firm has changed its model twice: in 2003 it opted to switch to an all-equity structure before reversing that decision four years later. 

When scrapping the all-equity model in 2007, CMS managing partner Dick Tyler said the move would allow the firm to promote lawyers into the partnership at the newly introduced salaried level when perhaps there may not have been the "complete business case" to do so before. 

CMS now has an equally split partnership with 50% all-equity and the remainder fixed-share. Up until May, the firm had been operating a three-tier partnership, but took the decision to scrap salaried partners. It says this will help junior partners progress more quickly.

Freshfields Bruckhaus Deringer is another to have ditched the all-equity model after voting in favour of introducing a fixed-share rank in 2006. Despite this move, the firm still has one of the highest proportions of equity partners, according to last year's figures, with 93% of partners holding full equity. 

PEP talk

Elsewhere, DLA Piper has gone against the grain by recently switching to an all-equity model – after initially reporting a 29% equity partner proportion – though this has not been without controversy. For the reporting of its 2012-13 PEP, the firm calculated the figure based on an equity partner number of 212 rather than its total partnership of 738. 

DLA said that, for reporting purposes only, those earning £400,000-plus are deemed to be all-equity, in line with American Lawyer guidelines. However, a senior partner at a rival UK firm scoffs: "So DLA move their LLP to all-equity, which, for a firm that had one third or less of equity partners, should drag down the PEP enormously. However, DLA doesn't publish PEP but publishes a figure that is the average of such partners earning more than £400,000 and then say this is their PEP? Very amusing." 

Despite such apparent contortions, many still question whether PEP is a measure that should carry any weight for firms and their partners – beyond bragging rights, of course. 

"Firms are encouraged not to pay too much attention to PEP," says Williams. "But it still has a totemic resonance in the market. It carries a level of significance by which the performance of a firm is often judged."

Leaitherland is more damning, calling PEP an "irrelevant" metric. Nevertheless, his firm's prudence with its equity ranks helped it record one of the largest PEP increases in the sector over the past five years, with growth of 26% from £340,000 to £429,000. 

He explains that the firm only admits partners into the equity whom it feels will make the right contribution: "We are keen to make sure that the equity within the business is owned by the people who deserve to own it rather than the people who have been there the longest. 

"Too many people probably still occupy equity roles because of what they contributed five years ago but the market has changed, and, unless they have evolved, they may not be contributing at the right level anymore." 

Tougher hurdles

But critics wonder whether the low proportion of equity partners at DWF – equivalent to just one in five partners – means there is a danger of unhappiness in the ranks, as those outside the chosen few become disillusioned at their prospects of making the step up.

For Williams, handling the expectations of lawyers in the non-equity ranks is critical. He sees no problem with firms operating a low level of equity partners as long as those on the outside have an understanding of what is required of them before making the step up – something Leaitherland insists is the case at DWF. 

However, Williams feels this is becoming a far bigger problem for law firms as they continue to tighten up the criteria on the equity partner litmus test to try to stem, or even reverse, the flow of partners making equity. 

This often leaves senior partners open to accusations of feathering their own nests and working under the assumption that they are in some way superior to the younger cohort of budding partners.

"The bar has been raised – firms are now applying a more stringent test," Williams says. "Lawyers are judged on a range of softer, less measurable skills, such as collaboration, recruitment and business development. This slows progression into the equity – where before you may have made equity in your early 30s, this has now been increased to late 30s."

Peter Jackson, managing partner at Hill Dickinson, agrees. "As with everything else in the legal sector, it is clear that attitudes are hardening towards promotion into equity and will continue to do so. It is inevitable that criteria for advancement will stiffen and partnerships will look harder at the strength of relationships held by any aspiring equity partner and the value and profitability of those relationships."

In today's current economic environment, this ability to generate business and build a client base is seen more than ever as a crucial requirement before being considered for equity status. 

As such, those not able to demonstrate clearly that they are selling work to clients can find themselves stuck in a rut, unable to progress and becoming a problem for management. 

Those stuck on the outside counter that even those with a clear track record of building business can find themselves frozen out. 

Senior managers insist they are becoming more ruthless about clearing the path for their best junior performers by raising the bar for those existing partners wishing to remain in the equity and nudging underperformers towards the exit. 

"Annual review processes are becoming more demanding and the need to continually perform is becoming ever-more relevant," says Jackson.

But as long as revenues and profit margins continue to come under pressure, so too will those looking for their share of the pie.  

• Click here to view the changes in equity partner charts