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Jennifer Wilson
The pros and cons of non-equity partnerships

Explore the benefits and pitfalls of this approach.

January 7, 2013
by Jennifer Wilson

The number of firms using non-equity partner programs has grown dramatically over the past several years. In my interaction with firms, I’ve found that such programs create both positive and negative results.  In this article, we’ll explore the benefits and drawbacks of non-equity (or “income”) partner programs across six important firm management attributes, as summarized in the table below. 

Management Attribute

Advantages

Pitfalls

Firm Career Pathing and Promotability

  • Firms can promote bright up-and-comers when their top-line revenue is not yet significant enough to sustain their admission as equity partners.
  • Firms can promote managers to income, or non-equity, partners without being committed to progress them further. This is a tactic we call “parking.”
  • The firm and the income partner can “test drive” their partner relationship before the income partner is admitted as an equity partner. This makes the promotion easier to “undo.”
  • Confusion can arise in the firm as to whether one has to be a non-equity partner before becoming an equity partner.
  • Most firms do not create enough of a distinction between income and equity partners in terms of competencies or responsibilities, creating confusion about roles and career paths.
  • Most firms do not document what it takes for an income partner to “earn” equity status, leaving income partners in the dark.

Recruiting

  • Firms can test-drive a partner-level candidate as a “direct admit” without having to commit to equity status initially.
  • Some firms believe that having a non-equity partner level gives them an “easy in” and an “easy out” if things don’t work out with a strong recruit.
  • Recruiting any outsider as an income or equity partner risks alienating young up-and-comers who believe these positions should go to internal candidates.
  • If a firm lists a lot of income partners on its website, top talent could view the partner ranks as overcrowded and dismiss the firm as a potential employer.

Retention

  • Firms may retain key people who do not qualify for equity partnership by acknowledging their value or contributions with a promotion to the partner level, albeit in a non-equity position.   
  • Firms risk losing bright up-and-comers who see a number of income partners “above” them and surmise that too many people are in the queue ahead of them for equity partner.

Marketing

  • Being able to promote someone to partner provides increased credibility for that person within the community—and the firm.  Having a non-equity partner level makes that promotion feel easier for firms.  
  • Some firms promote the distinction in levels by calling their non-equity partners “principals,” “directors,” or something else other than partner. This practice negates the marketing advantage of having an income partner level.

Governance

  • Firms can use the non-equity partner level to add new, often-younger voices to the organization’s decision-making processes.
  • Some firms do not allow enough decisions to include input from income partners.

 

Compensation

  • Income partners often have a guaranteed base salary, providing them with less earnings risk than equity partners have.
  • Because most compensation programs offer non-equity partners a share of net income, their focus on profit performance is heightened.
  • Most firms do not dramatically accelerate the income partners’ overall earnings when promoted, so this promotion is usually not costly.
  • Many firms do not spell out the income partner compensation program, creating confusion.  
  • Firms often don’t share the compensation differential between income partner and equity partner, so there is a lack of clarity about this. 
  • Sometimes, non-equity partners think they are being paid close to what equity partners make, but without the hassle of the buy-in or other partner-specific tasks and risks. This can cause non-equity partners to shy away from committing to full equity partnership.   

Buy/sell

  • Firms that consistently use a two-step process to admit equity partners can use the non-equity step to prepare potential equity partners for their buy-in, reveal the equity shareholder agreement to them, and share other details firm leadership might not feel are appropriate to share with all managers. Note: We advocate that you share those details with all managers.  
  • The firm’s buy-in process has to be “priced” at market value, which many firms overestimate, making the buy-in cost too steep for income partners.
  • Sometimes becoming an equity partner does not earn the non-equity partner much more in overall income, benefits, or authority, so it doesn’t seem worth it to commit to equity partner.
  • Sometimes, the firm’s equity acquisition process can cause an income partner to take a pay cut net of buy-in, and many cannot visualize the ROI of doing so.

 

As with any HR program, the non-equity partner program will have the most positive outcome when you are transparent, open, and honest about the program’s objectives, who qualifies to participate, and the specifics of how the program works. 

  • If you have parked people at this level because your equity group does not see them as future equity partners, make sure you share with them what is missing in their performance—whether it’s competency or character or both. That’s not a fun conversation and it could lead to losing some non-equity partners, but it’s better than not saying anything and running the risk of parked non-equity partners growing so frustrated with their lack of upward mobility that they disrupt your practice and hurt team morale. 
  • Be sure to tell your most important rising stars, or most valuable players (MVPs), what their path forward is and what the timeline looks like. If there are non-equity partners present “above them,” tell your MVPs where they are in the promotion hierarchy so their expectations are set and you don’t risk losing them due to assumptions on timing or place in line. For more information on answering the questions of your MVPs, see my article, “What’s your firm’s path to partner?”

If your firm has a non-equity partner program, consider asking your non-equity partners or other up-and-comers for feedback that can help you avoid the pitfalls and maximize the benefits of the program.  If you’re considering adding a non-equity partner level in your firm, use these insights to strengthen your program before you roll it out.

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Jennifer Wilson is a partner and co-founder of ConvergenceCoaching LLC, a leadership and marketing consulting and coaching firm that helps leaders achieve success. Learn more about the company and its services at www.convergencecoaching.com.