Paul Weiss Can Look to Crosstown Rival for Nonequity Blueprint

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at how one law firm’s experience with adding an income partner tier might provide clues for others who’ve recently adopted the strategy. Sign up for Business & Practice, a free morning newsletter from Bloomberg Law.

Paul Weiss last week announced its first set of new partners since the prestigious New York law firm said it would adopt a tier of “income” partners.

The number—34—was significantly more than its recent average of about 11 new equity partners.

The difference is explained, in part, by the fact that Paul Weiss’ new partners this year for the first time include some income partners. Those lawyers get the partner title, but don’t share in the firm’s profits in the same way as equity partners.

Much has been written about law firms adopting, or significantly expanding, their income or “nonequity” partner ranks. Cleary Gottlieb, WilmerHale, and Cravath Swaine & Moore, have recently adopted the strategy. The tier gives firms more flexibility in the increasingly competitive—and expensive—market for top talent.

Paul Weiss’ Chair Brad Karp acknowledged the still-experimental nature of the new tier on a podcast this summer.

“I don’t know how it’s going to play out,” Karp told Quinn Emanuel founder John Quinn, adding that it’s a move designed to stay competitive with peer firms.

For one answer, Karp can look to rival Simpson Thacher & Bartlett.

The Manhattan law firm adopted the income partner strategy in 2018. Its experience provides some hints about how the size of the classes might grow, and what the impacts could be.

Simpson’s income partner tier began very small and stayed that way for a few years before ballooning in size. The firm had six income partners in 2018, according to data from The American Lawyer. It had 83 income partners last year.

The growth in the income partner tier coincided with a rise in overall lawyer headcount. But the firm’s equity partner tier has remained relatively stagnant, hovering between 190 and 203 partners from 2018 to 2023.

The composition of a law firm’s lawyers is captured by a statistic known as leverage. It is a simple concept: How many lawyers are there for every equity partner at the firm? The larger the leverage number, in general, the greater opportunities there are for equity partners to generate profits.

Simpson’s leverage number was stuck at around 4-to-1 from 2014 to 2018. It rose to nearly 6-to-1 last year, marking a 45% increase in about half a decade.

The firm’s profitability metrics have also soared. Simpson’s profits per equity partner have spiked by nearly 60% since 2018, up to $6.4 million last year, according to Am Law data.

Paul Weiss has seen its leverage move in the opposite direction in recent years.

The firm had more than six lawyers working for every equity partner in 2018, but the ratio fell to about 4.5-to-1 in the past couple of years. Paul Weiss’ equity partner ranks rose from 145 to 178 over the same time.

Here’s the impressive part of the Paul Weiss story: Even while adding to its equity partnership, the firm was able to grow its profits per equity partner significantly. That metric is up 30% since 2018, to nearly $6.6 million last year.

That is no small feat, considering profits per equity partner is a simple metric: Net income divided by the number of equity partners. If the number of equity partners goes up, all else equal, PPP will go down. And that’s one incentive for the industrywide pressure limiting the ranks of equity partnerships.

At Paul Weiss, that profitability growth came before the firm added an income partner tier.

If you take a firm that was able to become significantly more profitable without income partners, and then add that strategy on top of it, you are likely to see an even greater boost over time. That’s the general benefit of leverage, which is almost an inevitable result of adding an income partner tier.

A rise in leverage may not play out immediately at Paul Weiss—the firm has hired a significant amount of partners this year, driven especially by its aggressive expansion in London. But the firm, to the extent it hasn’t already, will likely build up its roster of associates, counsel, and income partners.

If the firm over time can increase its leverage somewhere closer to six lawyers per equity partner—the feat accomplished by Simpson after adding its income partnership—Paul Weiss will be an even greater financial machine than it already is.

Judging by the size of its new partner class, the firm appears well on its way.

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That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.