Publication Type: Conference Paper/Unpublished Manuscript
Abstract: During the last decade, many of the nation’s largest law firms have converted from single-tier to two-tier (or multi-tier) partnerships. A parlance of large law firms, a two-tier partnership contains both “equity” and “non-equity” partners. At present, two-tier partnerships make up 75 percent of American Lawyer 200. The conventional explanation for the growth of the two-tier system (or, conversely, the abandonment of the single tier) is that it produces higher profits per equity partner (PPP), thus solidifying the prestige of the law firm and improving its ability to attract the best legal talent. Further, since rainmaking lawyers are much more likely to become equity partners, presumably equity partners in two-tier firms would earn higher incomes than equity partners in single tier firms.

Remarkably, a careful examination of Am Law 200 firms demonstrates that this conventional explanation is flawed. Drawing upon a comprehensive data set of Am Law 200 firms, this paper documents that PPP are significantly higher in single tier firms. The most profitable law firms tend to (a) operate as a single tier, (b) have high indices of prestige, and (c) maintain a large concentration of lawyers in New York City. This paper argues that the two-tier structure is primarily a competitive strategy adopted by “have-not” firms that are trying to retain their most valuable partners. However, based a 10-year longitudinal sample, there is no evidence that the two-tier structure produces higher PPP. Rather, in all markets, the growth in PPP tends to be much higher in single-tier firms.