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’ll 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 your application and at interview.

The legal profession has a reputation for being slow to embrace change, which, in the past, was 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 organisations modify or depart from this approach. As such, the number of firms that operate a fully ‘lockstep’ pay model has grown smaller over the years. Many of the changes came after top firms were losing talent to rivals who were offering more merit-based pay models (there’s more on this below).  

In this article, we explain the two broadly opposed types of law firm partnership and explore some variations within each.

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’ve 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 a partner at an international law firm. “A partner will know what their 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,” the partner explains. “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 for partners who make an “exceptional contribution”. In fact, on the firm’s values page it states that its lockstep profit-sharing structure “motivates partners to make decisions for the benefit of the whole firm”.

London-based law firms have been facing increasing pressure to adapt their pay models due to competition from US rivals. It’s crucial that law firms pay attention to what’s happening in the market and what their competitors are doing given that the war for talent is very much in its throes.

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 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’re in a lockstep or merit-based lockstep 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 LLP, CMS, Fieldfisher, Pinsent Masons LLP, Simmons & Simmons LLP, Stephenson Hardwood LLP and Linklaters have all shifted their remuneration models for associates from a post-qualification experience system to merit-based pay.

As one law firm partner explains: “Arrangements depend on the culture of the firm and the type of people it’s 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.”

A&O Shearman

Following the agreed merger of magic circle firm Allen & Overy and New York-based Shearman & Sterling to create global powerhouse A&O Shearman, questions were raised regarding the joint firm’s pay model. It’s since been reported that the combined firm is expected to operate a modified lockstep pay model (as above).

Eat what you kill

This is a colourful phrase used to describe a pay model that’s 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 won’t 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’ve 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’s 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 isn’t 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 Solicitors LLP among those to take advantage of the faster growth opportunities provided by opening a firm up to investors such as private equity funds. Knights, which describes itself as “the UK’s largest commercial legal services business outside London”, has now made 19 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, with DWF following suit in 2019. However, in 2023 DWF delisted from the LSE, with private equity firm Inflexion completing the take private of the firm in October 2023. According to Investopedia, a ‘take private’ transaction “means that a large private-equity group, or a consortium of private-equity firms, purchases or acquires the stock of a publicly traded corporation”. How will such a transaction and move impact the firm, its culture and partnerships? Only time will tell.

Overall, few firms have listed on the stock exchange and it’s clear that others aren’t racing each other to list, with law firm management keen to maintain control. James Knight, founder and chief executive of Keystone Law, warned that IPOs aren’t without risk, noting that “unless you’re going to build up and become much bigger and more profitable than you were before, then you’ve basically sold the family silver”. He added that a firm’s main asset is its lawyers which leaves the firm vulnerable, particularly if partners leave. City A.M. summed up his argument, stating “partner exits pose a particular threat to M&A expansion plans” and adding that “lawyers leaving acquired law firms have the potential to hollow out the value of acquisitions”.

Why should you consider firms’ partnership structures when applying?

The type of partnership a firm has is an important factor to consider when considering making a training contract application. “The form of remuneration model can impact the culture of the firm and therefore the experience of trainees and associates,” explains a law firm partner. “If candidates want to succeed at a firm and stay there in the long term, they'll 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 one partner. “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’s more acute in ‘eat what you kill’ practices. It’d 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 isn’t necessarily a negative but is an example of how the remuneration system will have a direct affect”.

Make sure 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 manager at LawCareers.Net.