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Written by David E. Wood
For every law firm to thrive, it must replace retiring partners and the revenue they generate. If companies are unable to do this, sales will decline as partners leave the industry, and this comes with all the negative consequences. Although business leaders work hard to avoid this outcome, they are often hampered by compensation-related obstacles.
One of these hurdles concerns the timing of senior partner compensation. Partners may wait until the last minute to announce their retirement plans, fearing that their compensation will be reduced if they announce their retirement plans too soon. Even talking about retirement becomes taboo.
If a partner leaves the firm with little or no prior notice, it is impossible to transfer the partner’s clients to another lawyer. Compensation systems that prevent partners from disclosing when they plan to retire effectively stop the succession process from proceeding.
For many companies, proposing an overhaul of compensation-related processes is sacrilegious, even if the goal is to remove barriers to succession. This may explain why, despite the widely accepted need for firms to replace retiring senior partners and retain clients, few firms are able to do so organically. there is. If law firms cannot address and correct this flaw in their compensation systems, they risk replacing top producers and losing client retention. As American novelist and social commentator James Baldwin wrote in a 1962 essay, “Not everything we face can be changed, but we can’t change anything until we face it. ”
Risk of disclosure
Some firms set partner compensation at the end of the year, when net income can be safely estimated, or early next year, when net income figures are known. For example, if a partner decides in early 2023 to retire at the end of 2024, his or her compensation for 2024 may be set for fear that if the firm finds out, there will be no reason to pay the partner fairly in 2023. We may withhold this information until further notice. To keep the firm in the dark, the partners did nothing to suggest they intended to leave, such as passing on clients to younger partners.
This fear may not be unfounded. In some firms, setting partner compensation is intended to help decision makers minimize the amount they pay partners so that they do not leave. If a firm knows that a particular partner is retiring soon and is unlikely to move laterally, it may calculate this minimum amount at a much lower number. If the company’s guess is correct, the partners will continue to work even though they feel they are being unfairly compensated. In this scenario, partners are unlikely to spend much non-billable time handing off clients to younger lawyers. Rather, the company did not guarantee that future retirees would leave without notice and hand over duties to their successors. As a result, it may be difficult to prevent a repeat of harsh treatment of a partner nearing retirement.
In firms where there is no precedent for such short-sighted behavior, partners may simply prefer to avoid risk and not reveal when they plan to retire. Even in firms that treat partners fairly, senior lawyers may still be reluctant to discuss retirement plans for emotional reasons.
Meaning of the word “R”
Older partners, no matter how capable and strong they are, may feel that saying the word “retire” is admitting that they have passed a pass. Some people believe they don’t have enough money and are embarrassed to talk about the issue, even if their fears are not based in fact. Most senior partners have been paid biweekly for decades, and the prospect of never getting paid again may cause anxiety.
Other senior partners cannot imagine themselves as anything other than lawyers. Some of these lawyers may want to retire but are unable to because retirement feels like the beginning of the end. Some partners have no interest in anything other than work and are ready to die sitting at their desks without a pencil. Others continue to haunt the office hallways long after they are no longer productive, feeling like they have nowhere else to go.
Law firms often respect partners’ privacy by not forcing them to commit to when they will retire. This is a dangerous practice. If a firm does not change its compensation structure to disclose the expected retirement date and eliminate the risks faced by partners, partners will leave without warning. This forces clients to find new lawyers on short notice and often leaves them with negative feelings about their previous law firm. As a result, these firms lose the revenue generated by departing partners and their reputations are also at risk.
Every dollar a firm loses by not retaining a departing partner’s customers is a dollar the remaining partner must bring in next year to stabilize top-line revenue. As these young partners acquire new clients and solve problems, the income they generate is used to make up for last year’s loss of clients to retired partners. The company may appear to be growing, but it’s only treading water.
In contrast, when a firm retains the customers of retired partners, the efforts of younger partners increase the firm’s profits and contribute to substantial growth. When companies don’t penalize partners for disclosing their retirement plans, they can begin to realize the benefits of productive succession planning.
It’s time to make a change
Traditionally, law firm compensation structures have been considered untouchable. However, several trends are now creating an opportunity for companies to rethink this approach.
The legal industry is experiencing a wave of consolidation. Each system requires the integration of two compensation systems, and with it the opportunity for modification and improvement. Other companies are revising their compensation systems to prevent partner companies from expanding laterally, while at the same time investing heavily in acquiring companies with horizontal expansion. A new focus on productivity is prompting other companies to eliminate outdated features from their compensation structures. For example, traditional credit sharing, where a partner who created a client in the past but is no longer providing services continues to receive a portion of collections. These and other market forces are driving a more generous view of compensation.
In this dynamic environment, now is the time to change compensation processes to allow partners to disclose termination dates well in advance of transitioning their work to their successors. Recognizing the value of the many unbilled hours that departing partners have to spend successfully transitioning their customers is one way to protect the compensation of these partners. Companies should address this
Invest time and money in strategic spending to protect client revenue streams that would evaporate if a partner left with little or no notice.
Promoting trust in how partners’ compensation is calculated is another way to encourage disclosure of retirement plans. Factors involved in determining a company’s compensation, such as collections, time spent on administrative tasks, and other non-billable work that benefits the company, may not need to change. In some cases, all you need is more transparency. Once partners see how compensation is calculated, challenge it if they feel it’s unfair, and receive a fair hearing, they may feel more confident in the process. If the process is opaque, partners are likely to lose confidence and fear unfair treatment, leaving their retirement plans on the edge.
To improve succession planning and protect profits, companies need to make it easy for senior partners to share their retirement plans. Without this, companies would struggle to fully replace the revenue generated by retiring partners and fail to ensure long-term sustainability as the next generation takes over.
David Wood is a retired trial attorney who helps law firms and senior partners plan and implement retirement succession programs. Please send an email to (email protected).
