Cleary Gottlieb Adds Non-Equity Partners as Industry Shifts (1)

Cleary Gottlieb will start naming non-equity partners, following rivals that use the classification to retain top associate talent.

Cleary recognizes the “innovation and adaptation” occurring across the legal industry, managing partner Michael Gerstenzang said in an interview. The firm’s goal is “to create more opportunities for people to become equity partners,” he said.

Paul Weiss, WilmerHale, and Cravath Swaine & Moore are among Cleary’s Big Law competitors that added the tier in recent years. Non-equity roles help firms retain mid-level lawyers who aren’t ready for a top promotion while protecting firm profits for the brightest stars.

While the non-equity role brings partnership status for lawyers in the tier, the attorneys don’t fully share in firm profits in the same way equity partners do. The addition of the tier can ruffle associates who anticipated earning equity more quickly.

Bestowing the partnership title on more senior associates can help them develop business while granting law firms more time to determine if that lawyer should earn equity, said Jon Truster, a New York-based partner at legal recruiting firm Macrae.

“It will generally allow a firm another three or four years to evaluate their younger attorneys and delay making a decision about equity partnership,” Truster said.

Cleary Gottlieb Steen & Hamilton plans to add a mix of equity and non-equity partners to its next class of associate promotions, Gerstenzang said. He didn’t specify how many lawyers would join the new tier.

“The principal focus here is to allow associates to be promoted to non-equity partner with the goal of having them then take advantage of development opportunities and demonstrate professional development so that we can promote them to equity partners,” he said.

Michael Gerstenzang of Cleary Gottlieb

The firm doesn’t intend to move equity partners into the non-equity role or to build a large class of permanent non-equity partners, Gerstenzang said. The firm didn’t make the move in response to recruiting needs and isn’t making broader changes to its pay system, he said.

Cleary last year had 180 equity partners, according to data from the American Lawyer. That was 11 more than in 2022 and roughly the same as the firm had in 2019.

The firm’s revenue in 2023 was nearly $1.5 billion and its partners earned on average $4.5 million, American Lawyer data show.

Single-tier partnerships are becoming increasingly rare at elite firms. The evolution of the non-equity tier comes at a time when profitability has surged among the high-end firms that were among the longest to cling to a single-tier partnership.

For those firms, adding equity partners can become more expensive as profitability increases. That’s because a gap grows between senior associate salaries, which are largely set by a Big Law market scale, and the compensation allotted to the lowest rung of equity partnerships. Adding non-equity partners can help smooth that transition.

An ‘Imperative’

Many firms adding non-equity partners are responding to an “imperative” to grow their scale and profitability, said Kent Zimmermann, a principal at law firm consultancy Zeughauser Group. The tier helps most firms grow, but it also adds management challenges, he said.

“It will take discipline to manage the non-equity tier to make it an engine of profitability,” he said. “The discipline required will be challenging within the bounds of the culture that many firms have.”

Since non-equity partners carry significant pay, it requires management to make tough decisions on whether non-equity partners ultimately earn equity status or need to be counseled out of the firm.

The ranks of non-equity partners among the top 100 firms by revenue has increased by nearly 23% since 2019, according to American Lawyer data. The total number of equity partners has remained flat over that period. The two groups are now roughly the same size among the 100 largest firms.

Gerstenzang has been managing partner at Cleary since 2017. The firm previously declined to adopt a non-equity tier in 2020 when it made changes to its formerly lockstep compensation system.

Speaking to Bloomberg Law last year, Gerstenzang said in 2020 the firm felt its “culture” wasn’t prepared to be as “disciplined or ruthless” in managing under-performing non-equity partners.

The addition of the non-equity partner tier now is a sign of how much has changed in the Big Law landscape.

“Big Law, compared to just about any of our clients, has changed very little over the last 25 or 30 years,” Gerstenzang said. “And for us to remain as effective as we want to be in client service, we need to continue to adapt.”