Succession Planning : When retirement is a taboo subject, succession planning is doomed

By David E. Wood

All law firms must replace retiring partners and the revenue they produce if they are to prosper. If a firm cannot do this, top-line revenue will drop as its partners leave the profession, with all the negative consequences this entails. As hard as they work to avoid this outcome, firm managers are often stymied by compensation-related obstacles.

One of these obstacles concerns the timing of senior partner compensation. Partners may wait until the last minute to announce their retirement plans because they are afraid their compensation will be cut if they do so sooner. Even discussing retirement becomes taboo.

When a partner retires with little or no advance notice, it is impossible to transition the partner’s clients to other lawyers. Compensation systems that discourage partners from revealing when they will retire effectively stop the succession process in its tracks.

At many firms, it is sacrilege to suggest an overhaul of any process related to compensation – even when the objective is to remove barriers to succession. This may explain why, despite the widely accepted need for firms to do better at replacing retiring senior partners and retaining their clients, few can do so systematically. If law firms fail to address and correct this flaw in their compensation systems, they risk being unable to replace their top producers and retain their clients. As American novelist and social critic James Baldwin wrote in a 1962 essay, “[n]ot everything that is faced can be changed, but nothing can be changed until it is faced.”

Disclosing retirement plans can be risky for senior partners

Some firms set partner compensation either at year-end when net income can safely be estimated, or early the following year when the net income number is known. For example, a partner who decided at the start of 2023 to retire at the end of 2024 might withhold this information until the 2024 compensation numbers are set, fearing that if it knew, the firm would have no reason to pay the partner fairly in 2023 or 2024. To keep the firm in the dark, the partner would do nothing suggesting an intent to leave – like transitioning clients to younger partners.

This may not be an unfounded concern. At some firms, setting partner compensation is about finding the minimum the decision-makers can get away with paying partners to keep them from leaving. If a firm knows that a particular partner will soon retire and is unlikely to move laterally, it may calculate this minimum amount at a much lower number. If the firm guesses right, the partner stays on despite feeling unfairly compensated. In this scenario, it is unlikely that the partner will spend a lot of nonbillable hours transitioning clients to younger lawyers. Rather, the firm has ensured that future retirees will leave without notice and without migrating their practices to successors. The resulting cycle of sharp-elbowed treatment of partners near retirement may be difficult to arrest.

At firms where there is no precedent for such short-sighted behavior, partners may simply be risk averse, preferring not to disclose when they plan to retire. Even at firms that treat their partners fairly, senior lawyers may still be uncomfortable talking about their retirement plans for strictly emotional reasons.

The negatives of saying the “r” word

Older partners may feel that letting the word “retirement” cross their lips is an admission that they are over the hill, no matter how competent and robust. Some are embarrassed to discuss the subject because they think they have not saved enough money, even if this sense of insecurity may not be based in fact. Most senior partners have received a paycheck every other week for decades, and the prospect of never getting another one may provoke anxiety.

Other senior partners cannot imagine themselves as anything other than lawyers.  Some of these lawyers may want to retire but cannot permit themselves to do so because retirement feels like the beginning of the end. Some partners have no interests outside work and resolve to die at their desks without ever having put their pencils down. Others may haunt their firms’ hallways long after they stop being productive, feeling they have nowhere else to go.

Law firms often do not press partners to commit to when they will leave practice, out of respect for their privacy. This is a dangerous practice. If firms do not change their compensation systems to eliminate the risks a partner faces by revealing an intended retirement date, their partners retire without warning. This forces clients to find new counsel on short notice, often leaving them with negative feelings toward their previous law firm. As a result, these firms lose the revenue once generated by retiring partners while putting their reputations at risk.

Every dollar in revenue that a firm loses by not retaining its retiring partners’ clients is a dollar that the rest of the partners must bring in next year to keep top-line revenue steady. When these younger partners bring in new clients and matters, the income they produce goes to backfilling last year’s loss of retiring partners’ clients. The firm may look like it is growing, but it is just treading water.

By contrast, when a firm keeps its retiring partners’ clients, the efforts of its younger partners increase firm profits and contribute to real growth. When a firm does not penalize partners for disclosing their retirement plans they can begin to realize the benefits of productive succession planning.

The time is right to make changes

Traditionally, law firm compensation structures were considered untouchable. However, several trends are now creating opportunities for firms to reconsider this approach.

The legal industry is experiencing a wave of consolidations. Each one requires the merger of two compensation systems, with attendant opportunities to correct and improve them. Other firms are investing heavily in acquiring laterals, simultaneously revising their compensation systems to prevent partners from making lateral moves. A new emphasis on productivity is leading other firms to purge their compensation structures of antiquated features, such as legacy credit-sharing, where a partner who originated a client long ago, but no longer serviced its work, continued to receive a share of collections. These and other market forces are fueling more open-mindedness about compensation.

In this dynamic environment, now is the time to change compensation processes so that partners can disclose their retirement dates far enough in advance to migrate their practices to successors. Recognizing the value of the many nonbillable hours that retiring partners must devote to successfully transitioning their clients is one way to protect these partners’ compensation. Firms should treat this

investment of time and money as a strategic outlay that protects client revenue streams that otherwise would evaporate if partners left with little or no notice.

Promoting trust in the way partner compensation is calculated is another way to encourage disclosure of retirement plans. Factors going into a firm’s compensation decisions, such as collections, time spent on management duties, and other nonbillable work benefiting the firm, may not need to be altered. Sometimes, all that’s needed is greater transparency. When partners see how compensation is calculated, can object if they perceive inequity, and receive a fair hearing, they may feel more confident in the process. If the process is opaque, partners lose this confidence and are more likely to fear mistreatment, keeping their retirement plans close to their vests.

To improve succession planning and protect revenue, firms must make it easy for senior partners to share their retirement plans. Without this, firms will struggle to fully replace the revenue generated by retiring partners and fail to ensure their long-term sustainability as the next generation takes over.

 

 

David Wood is a retired trial lawyer who helps law firms and senior partners plan and implement retirement succession programs. He can be reached at  [email protected].