An Empirical Study of Single-Tier Versus Two-Tier Partnerships in the Am Law 200

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 two-tier firm contains separate tracks for "equity" and "nonequity" partners; the equity tier typically controls the firm and enjoys a larger per capita share of the firm's profits. At present, two-tier partnerships make up 79% of the Am Law 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. Drawing upon a comprehensive dataset of Am Law 200 firms, this study documents that average PPP are significantly higher in single tier firms, even after controlling for geographic market segment and firm leverage. The higher profitability of single-tier firms appears to be a function of higher levels of prestige, which enable single-tier firms to (a) attract and retain a more lucrative client base, and (b) run a more rigorous promotion-to-partnership tournament in which associates work longer hours and are less secure in their futures with the firm.

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StrategyBill Henderson