Pay gap continues to jump between equity and non-equity

The pay gap between equity and non-equity partners continues to increase globally, and Australia is no exception: We explore why this is happening and whether the trend is here to stay

The compensation gap between equity partner and non-equity partners, particularly in the larger law firms, continues to leap in a market where “the cake is getting bigger but the slices are less”.

The issue has been gaining prominence in the United States after being highlighted by legal search consultant, Major, Lindsey & Africa.

The third edition of its Partner Compensation Survey revealed that average equity partner compensation is US$971,000, as compared to the non-equity partner average of US$338,000.

The reported average originations by equity partners of US$2.81 million in 2014 represents an increase of 7% while the reported average originations by non-equity partners fell 6% to US$670,000.

Closely related to this, the research found that now more than ever compensation is driven by a partner’s ability to bring in revenue.

Of the survey respondents, 74% considered originations to be very important when determining compensation and 66% cited originations as the most important factor.  Furthermore, 55% of all respondents considered originations as becoming a more important factor than in the past.

But these results aren’t unique to America and we’re increasingly seeing the same trends Down Under says Katherine Sampson, the managing director of legal recruitment agency Mahlab.

Although the agency’s comprehensive 2014 report didn’t specifically distinguish between equity and non-equity, Sampson told Australasian Lawyer the pay disparity is something she’s very aware of in Australia.
Here – in the major firms – non-equity partners are likely to be earning about two-thirds of that of their junior equity counterparts, and less than half of a full equity partner, she says, adding that there are a number of different categories non-equity partners fall into.

The “classic” is the senior associate who has proven themselves and will be made partner as a stepping-stone to becoming an equity partner. While their salary will still be below a junior equity partner, most lawyers in this category expect to be earning less.

“The next part is the de-equitised partners. They are either not meeting billing standards or want to pull back from full-time work,” Sampson says. “That group is a hard group for firms to manage. In going back to employee status, to the world you look like a partner, but you’re not really going anywhere.”

If the partner has been de-equitised for performance issues, those issues will probably not go away, and in some cases the problem can become even more entrenched.

But Sampson stresses that not everyone who makes the transition from equity to non-equity has done this because of performance issues – a large proportion have actively chosen to pull back for a variety of reasons.

The last group of non-equity partners are those that are not on track to equity at all.

This is especially common in mid-tiers where there’s a very small equity holding, or in firms that are modelled on having a small leadership base, she says.

Overall, the trend has seen fewer numbers of equity partners in the Australian market and new seniority structures being created to delay entry into equity.

“Not only are people having equity taken off them, but it’s much harder to get equity now,” she says. “They don’t want to share the equity cake, so they’ll create another category pre-equity…We’re assuming they’re earning more because the cake is getting bigger but the slices are less.”

This withdrawal from sharing equity has been a phenomenon that has occurred particularly over the past three years in response to an overall tightening in the market, and Sampson doesn’t see it changing anytime soon.

Looking forward, she says a new trend lies amongst equity partners themselves.

Those who have the ability to generate fees and have a captive client base are sometimes being paid “super bonuses” in an effort to keep them at that firm, creating growing disparities between them and those who are on the same number of equity points but are not performing at the same level.

“That’s becoming more pronounced because over the past few years partners have been more inclined to move around,” says Sampson.

John Nerurker, The CEO of national firm Mills Oakley, told Australasian Lawyer he feels a remuneration model built on a blatant disparity between equity and non-equity partners is counterproductive over the longer term.

“It breeds resentment and can cause good partners to jump ship to other firms. That is the last thing we should want in the legal profession, where clients follow legal talent. And like many countries around the world, the Australian legal sector has an active lateral market,” he says.

Nerurker believes the pathway to equity needs to be transparent and with crystal-clear criteria.

“I like to refer to it as ‘equity in equity’. That is, we have an equitable approach to achieving equity at Mills Oakley. If you meet the criteria – and there’s nothing muddy about those criteria – then, as sure as night follows day, you can be guaranteed to be formally considered for an equity position.

As of July 1, the firm, which currently has a partnership of 60, has promoted 9 salaried partners into the equity ranks.

“It means that we are not only retaining great legal talent at the partner level but our more junior lawyers can see the possibilities for themselves,” says Nerurker.

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