Managing partners feeling knocked off stride by the recession had best look around because another numbers-jarring wave is headed to shore. Get ready for the quarter-million-plus baby boomer lawyers who are gearing down—or up—for a new kind of retirement.

Firm partners who are now entering their retirement years are quite unlike the picture of the staid senior lawyers of yesteryear. Popular consensus is that today’s 65-year-olds operate at a much higher physical and mental level than those of any previous generation. Hence, your senior lawyers are often racquet ball-smashing marathon-runners who are very much at the top of their game. And a surprising number want to continue practicing law in some capacity even after age 70.

Typically, the motivation to continue practicing has been the stimulation and sense of purpose it provides. Today’s recession, however, has eroded many retirement nest eggs and increased the number of baby boomer partners who are motivated to stay on for economic reasons. This means that as firms move into 2010 and beyond, facing the challenges relating to partner retirement agreements will be critical.

As partners under old agreements demonstrate that they are not slowing down their practice, firm leaders will have to make some choices. They must create environments where leading partners are able to maintain key client relations while still transferring responsibilities to younger partners. They must also deal with the issue of a retiring partner’s equity ownership. Ultimately, the question will be: How do you create a strategy that (1) allows partners to continue to practice, (2) mandates a client transition plan, (3) adapts compensation to keep each partner interested in overall firm financial success, and (4) fold it all into an ongoing policy? The partnership will have to work out divergent opinions, but developing a forward-looking strategy that aligns with economic realities will be necessary to avert a crisis. Here is four-phase guidance on getting to that goal.

Step One: Creating the Planning Forum

A healthy transition plan requires senior partners to maintain key client relations while enlarging the relationship to include junior partners. Before discussing retirement planning with partners, leadership needs to identify the key clients to be affected by the policies. Next, you must evaluate the depth of experience in the various practice areas. Then you have in-depth discussions so that retirement-age partners can share their concerns and hoped-for considerations from the firm. All partners should share a desire to adopt best practices. Leadership’s job is to foster an environment in which the required changes will happen in a positive way.

Step Two: Designing Individual Transition Plans

At minimum, no later than the beginning of the year in which a given partner turns 64, he or she should confer with the managing partner about retirement plans and agree on a timeline for finalizing a written transition plan. Depending on the firm’s size and structure, this may be a more formalized process in which the plan is endorsed by the partner’s department leader and the managing partner before being submitted to the governance committee for final approval. Each transition plan should accomplish the following:

• The retiring partner identifies existing clients and recommends which lawyers should begin taking responsibility for the relationships over a specific time period.
• The partner and designated new attorneys define how they will take joint responsibility for the client during the transition period. Sharing of any financial incentive credits relative to the client should begin in the first year, with full credit transferred by the end of the transition period.
• A retiring partner holding key firm responsibilities, such as a practice group chair, recommends a successor who can assume the role by the beginning of the year the partner steps down.
• The transition plan is then reviewed and updated annually to cover the transfer of any new clients, as well as any other changes in circumstances that may require amending the plan.

Step Three: Addressing Compensation and Firm Equity

This is probably the most difficult phase and will require customization by each firm. To illustrate what may be involved, the following assumes a partnership structure with equity represented by units, with each unit given a dollar value each year based on budgeted distributable revenue. These then would be the key recommended provisions:

• The retiring partner’s equity ownership in the firm is reduced over a five-year period, beginning at age 65. The simplest method is to give up an equal amount of units annually over the five years. Alternatively, that could be staggered with 30 percent given up in year one, 25 percent in year two, 20 percent in year three, 15 percent in year four, and 10 percent in year five.
• The retiring partner retains the right to vote with other equity partners.
• At age 70 (or the end of the five-year period), the partner may remain on a contract or of counsel basis.
• Equity partners have a unit adjustment made annually based on the partner’s financial performance over the previous three years. If a retiring partner’s financial performance indicates a downward trend in one year, there is more emphasis placed on the prior year’s statistics.
• The retiring partner is reviewed annually based on financial performance and subjective factors, like other equity partners, as well as based on carrying out the transition plan. The partner is eligible for an annual bonus equivalent to that which would have been received if not for the reduction in equity.

Step Four: Creating an Of Counsel Compensation Policy

Some firms allow retiring equity partners to surrender their partner units and enter into an of counsel relationship beginning with the year in which a partner turns 65, or at the beginning of any subsequent year. Here is an example of how an of counsel compensation policy may be structured:

• Fee-sharing percentages or other forms of compensation are negotiated with the retiring partner.
• Where there is fee sharing, the of counsel’s percentage of timekeeper collections decreases by 50 percent for collections that exceed the of counsel’s three-year average. The of counsel’s percentage of timekeeper collections is also subject to quarterly reconciliation of any deficiency in covering overhead and an amount of profit equal to his or her three-year average.
• In addition, the fee-sharing percentage of originated collections for work performed by others should increase by 50 percent for collections that exceed the of counsel’s three-year average.

No one is saying that updating firm retirement policies will be easy—but now would be the perfect time to do it nonetheless. Otherwise, you may be courting crisis with policies that are woefully shortsighted.