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Retirement Special Issue

Your Next Managing Partner

Succession Planning Strategies: Dos and Don'ts.

 Table of Contents

December 2007 Issue | Volume 33 Number 8 | Page 40
Features

Transitions: Retirement and Succession

What It Takes: Making Retirement a Transition Rather Than a Jump Off a Cliff

Firms of all sizes are struggling with retirement policies. Holland & Hart is tackling the issue with a pumped-up flex-time program.

One of the great challenges for any law firm today is keeping partners in the boomer generation functioning happily and productively as they begin to move toward retirement age. These partners typically control many of the firm's key clients. They are also leaders in firm and practice group management. What would happen if these partners retired in droves? It could have severe consequences for a firm.

The retirement policies of the typical firm were developed many years ago and follow the corporate model of working full-time until a certain age, usually 65, after which complete retirement ensues. But such policies don't conform to today's emerging patterns of transition to retirement, putting firms at risk of lost productivity or early departure of key partners. Many boomer-generation lawyers will enjoy greater longevity and want to work at a full pace long past 65. If their firms require retirement at 65, they will take their energies and clients elsewhere.

At the same time, others will be either unwilling or unable to work at a full pace until 65, in many cases as the natural result of the aging process. Also, some partners' practices are sustained by relationships with in-house counsel or individual clients who retire, pass away or sell their businesses. Younger partners won't be inclined to subsidize them, so these senior partners' compensation will keep declining, heightening the depression caused by client departures, reduced energy or health problems—leading to a further reduction in billable hours. Under mandatory retirement policies, this downward spiral suddenly ends at age 65, when the gold watch ceremony ends a long career at the firm.

This is bad for the partner, obviously, but also bad for the firm. The anxiety, anger and depression that can occur before retirement can lower productivity dramatically and also make succession planning impossible. The knowledge that a shove off the cliff is coming has the same impact. And when the shove comes, the firm has lost a valuable resource who could have continued contributing to the firm without requiring subsidization.

Building a Program to Help the Transition

Holland & Hart began thinking about this problem several years ago. It has a very successful part-time program, which in design and practice is geared toward women lawyers in their childbearing years. To participate in the program, a lawyer must submit a written proposal detailing the part-time schedule desired, along with an economic analysis showing that no subsidization will occur. A woman partner who was formerly in the program now oversees it.

The program, however, is not limited to women of childbearing age, and management began to focus on expanding its use by partners wanting to slow down as they approach retirement. Initially, senior partners resisted for two reasons: (1) they did not like being seen as being on the "mommy track," an impression they felt the term "part-time" conveyed; and (2) they did not feel comfortable about dealing with a younger woman advisor.

We dealt with these problems by calling it a "flex-time policy" and providing that senior partners can deal directly with the firm's managing partner. Admittedly, there is still some resistance, but a number of partners are now in the program. There are others for whom it would also be a good idea, but they will have to see the program in practice for a few more years before they can get on board.

The major problem is this: At Holland & Hart, as at most firms, the determination of points that tie to compensation is retroactive. In other words, performance for the previous two years determines their points for the next two years. Consequently, going on the flex-time program accelerates the decline in units. For example:

  • If a partner was at 90 percent of expectancy for the past two years but will go to 75 percent for the next two years, he can stay off the program and enjoy points resulting from a 90 percent performance for the next two years while he works at 75 percent.
  • If he goes on the program, he immediately goes to 75 percent. Worse, he is getting 75 percent of a 90 percent award.

To counter this, the compensation committee must address the flex-time arrangements at the same time it deals with compensation. In spite of the 90 percent performance, the committee has to determine the points that a partner would have been awarded if she had worked at 100 percent of expectancy. The committee must be quite generous in making that determination to avoid the retroactive impact.

For example, assume a partner had been at 10 points, but was reduced to 8 points because he was working at 80 percent of his hourly rate expectation, with a concurrent decline in his production. Now this partner wants to work on a flextime basis at 70 percent. To preserve the partner's status in the firm, the compensation committee places him back at the full 10-point level, but pays him at 70 percent of this level. That way his payment is commensurate with his hours worked.

This accomplishes multiple things. First, those on the program are very happy with it for two key reasons. One, the status conveyed by being ranked at the 10- point level is preserved. Two, their billable-hours expectation has gone down. If they are at 75 percent, they have a 1,350-hours expectation rather than a full 1,800-hours expectation. This removes a great deal of stress.

The policy also provides that if they work at more than 75 percent, their compensation will increase to the actual percentage they worked. So if they work at 80 percent, they will be paid at 80 percent by way of an extra payment at the end of the year. On the other hand, if they work at less than 75 percent, their compensation will not be reduced, but it will affect their next award of points, just as it would affect any full-time partner failing to meet the hours expectancy.

Meanwhile, if they meet their hourly rate expectation (at 75 percent), the partners' points show on the firm roster at the full 100 percent award. This provides an important benefit because, while partners can always inquire into their flex-time status, the full award on the roster avoids the potential embarrassment of colleagues seeing a constantly declining point allocation.

Incorporating Client Succession Planning

Another key component of any transition to retirement is succession planning for clients. Many firms are now moving to client teams, which lessens the problem. But most firms still have key clients for whom one partner maintains the relationship. Transitioning this role to a new partner can take a number of years. To initiate the process, the senior lawyer must be ready to commit to retirement. Most are reluctant to do so three or four years in advance, which is understandable because it involves making a critical decision to move to a new stage of life. Lawyers are, after all, risk-averse by nature, so their committing to moving into unknown waters years in advance is not a simple task.

And yet having senior partners make the needed commitment is critical to succession planning. Mary Cranston, senior partner of Pillsbury Winthrop Shaw Pittman, reports that every partner there has to prepare a written plan for the forthcoming year that sets out practice and client development plans. The plan is then reviewed and approved by the individual partner's practice group leader. This is a good vehicle for discussing succession planning. And since every partner has to prepare such a plan, those moving to retirement are not being singled out for special scrutiny.

Another barrier involves the question of compensation. Good succession planning requires turning over responsibility for billings, a process that can result in lower billing hours for the senior partner. If the process is to succeed, however, there must be assurances that lower hours and billings will not result in reduced compensation.

Knowing When Retirement Is Necessary

People age at different rates. Some will be working at full pace at 65 and beyond, and the firm would be well served by their continued service. Others will have slowed down considerably by 65 and may even pose a malpractice or client retention risk. The challenge is to allow the first type to stay on while making the departure of the second type as routine and inevitable as possible.

Holland & Hart's partnership agreement provides that retirement at 65 is mandatory unless the partner's billable hours have averaged more than 1,200 per year for the past five years. Those meeting that standard can continue as partners after 65 as long as they maintain a billables pace of 1,200 hours each year thereafter. A partner turning 70 must retire as a partner and can only continue with a compensation agreement if the management committee finds the circumstances are extraordinary.

Other firms are abandoning mandatory retirement requirements entirely. Mary Cranston reports that Pillsbury Winthrop has done so, mostly because of concern that the requirement will cause partners who want to stay fully productive to leave the firm as they approach 65. While mandatory policies can always allow for exceptions, Pillsbury was concerned that partners would not be comfortable relying on discretionary decisions and would make their plans without consulting management.

There is also some concern among larger firms that mandatory policies could lead to litigation as a result of the Equal Employment Opportunity Commission's suit against Sidley Austin, which contends age discrimination legislation applies to partners. (See the sidebar article.)

Continuing the Relationship Post-Retirement

So how can a firm keep valued counselors in the fold even after they retire as partners? Many at Holland & Hart continue to work in an of counsel relationship (as I do). While they are sometimes paid a salary, that is generally not favored because it carries with it a work expectation that most retired partners want to avoid. Instead, the majority are paid a percentage of the amount billed for their work. In addition, any partner who retires after his or her 56th birthday is entitled to office space, support services and business expense reimbursement as the managing partner deems appropriate. The only restriction: The partners may not practice law on their own account from the office or using the support services.

The looming question is whether the potential retirement of the firm's many partners in the boomer generation will require more substantial office sharing. Until now, few partners have retired before 65 and many have not wanted an office (or at least for long).

But to date, the post-retirement system has worked quite well. At very little cost to the firm, it enables the kind of socialization that is otherwise lost to these partners, while giving the firm continued access to their wisdom, institutional knowledge and client relationships.

Firms everywhere need to establish ways in which retired partners can continue to help the firm. There are many ways retired partners can do so, including by mentoring associates, conducting in-house training and peer-review programs, and participating in public service programs. Now, whether they should be paid for these services, or the services should be regarded as a trade-off for the provision of office space and support, is a matter for firms to consider individually.

Custom-Tailoring for Rising Numbers

Each partner moving into senior status presents unique circumstances. There are the hard-charging, ageless types with big books of business who the firm cannot afford to lose, the successful ones who simply want to slow down with dignity, and those with a variety of physical or emotional problems who need to be gently shown the door. Flexibility is the key to dealing with each partner. Consequently, only the most general policies can be useful. The hard work of crafting the right arrangement in each case must fall to firm management.

One thing is certain, however. As the boomer generation moves into the retirement category, crafting appropriate policies, albeit a time-consuming assignment, will be critical to the firm's future.

About the Author

Edward H. Flitton is former Managing Partner and now Of Counsel to Holland & Hart LLP. He is a member of Law Practice's Editorial Board and the ABA Law Practice Management Section Council.

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