October 25, 2016

Transitioning Clients and Setting Compensation for Partners Approaching Retirement

Joel Rose

This article describes a common procedure that may act as a guide relating to the retirement of partners.

While most firms like to consider clients to be clients of the firm and not clients of any particular attorney within the firm, it is generally acknowledged that specific attorneys are responsible for developing, nurturing and maintaining the firm’s relationship with each of its clients.

To continue to maintain the firm’s good relationship with these clients upon the retirement of these lawyers, certain steps should be taken to allow and assist other attorneys within the firm to develop a direct relationship and have responsibility for managing these clients.

During the years preceding retirement, a retiring partner may wish to gradually reduce the number of billable hours that he or she spends on client work.

Additionally, many partners believe that it is counter-productive to the transition process for a retiring partner to continue to perform a significant amount of billable work for a client being transitioned to another partner since it takes away opportunities for others to develop relationships with these clients. Further, it is generally recognized that transitioning clients from the retiring partner to another member of the firm will require time and effort on the part of the retiring partner, which may not be billable.

As a management consultant to law firms, I consider it important that certain considerations be taken into account when setting the compensation of retiring partners. Retiring partners need to be motivated to (1) spending their time transitioning clients to other members of the firm, (2) providing greater opportunities for others to develop working relationships with clients to be transitioned and (3) over time, reducing the billable hours of retiring partners as they move toward retirement, without being penalized from a compensation standpoint.

1. Notification of Intended Retirement Date

To begin the transition process, I believe that each partner has the obligation to notify the managing partner of his or her intended retirement date, at least three to five years before their actual retirement from the firm. This notification will begin the transition period, which will end upon the partner’s retirement, during which time certain steps will be taken to transition the retiring partner’s clients.

2. Identifying Clients to be Transitioned

I recommend that the retiring partner and the managing partner schedule a meeting to review those clients the retiring partner originated or serves as the key client relationship partner. They should also review the types of work and fees generated by these clients.

3. Transitioning Duties

The retiring partner and the managing partner should agree upon those tasks and transitioning activities that will be performed by the former during his or her transition period. These may include regular visits to the client by the retiring partner and the partner to whom the client will be transitioned in order to “showcase” to the client the legal capabilities and style of the transitioning partner. This helps ensure that the client will continue to receive excellent legal services and feel comfortable dealing with the transitioning partner.

A retiring partner may not have originated a client or have responsibility for a client to be transitioned, but may have significant matter responsibility for a client. Therefore, it is important for the firm to establish transitioning activities for this partner that addresses the transition of these important client relationships.

4. Evaluating the Transitioning Efforts

Annually, during the transition period and in connection with the firm’s annual compensation review process, an evaluation will be made by the managing partner, with the transitioning partners, about the retiring partner’s efforts in performing the transitioning activities performed by the retiring partner during the previous year. As part of this evaluation, the retiring partner will describe to the managing partner the duties performed by the former during the previous year. The managing partner will review the financial data about the objective contributions made by the retiring partner, and other information obtained during personal interviews with the transitioning partner, the head of the practice group in which the retiring partner performs most of his or her work and other partners involved with the retiring partner’s performance and transitioning activities. The managing partner will then evaluate how well the retiring partner is performing the transition duties.

5. Setting the Retiring Partner’s Compensation

Generally, the compensation of those partners who are transitioning toward retirement will be determined in the same manner as compensation for all other partners, taking into account partner origination collections, client liaison collections, matter origination collections and working attorney collections, together with other factors that the managing partner and members of the management/compensation committee may consider relevant. However, with respect to the retiring partner, the managing partner and members of the management/compensation committee will pay particular attention to the former’s performance of the transitioning duties assigned. If it is determined that the retiring partner is satisfactorily performing the transitioning activities, the retiring partner will continue to receive full credit for those fee collections from clients being transitioned, in the various categories considered by the managing partner and members of the management/compensation committee in setting compensation. However, if it is determined that the retiring partner is not satisfactorily performing the transitioning activities (or if the fees generated from these clients increase or decline) those factors will also be considered in setting the retiring partner’s compensation, and the compensation may be increased or reduced.

6. Dual Credit for Client Collections

To provide incentive to those partners to whom clients are being transitioned, and to insure that those attorneys are fairly compensated for their efforts in transitioning and maintaining these client relationships, the partners designated to be the transitioning partners for the client to be transitioned will also receive credit under the categories as may be applicable, for the fees generated by these clients during the transition period, provided that the managing partner and the members of the management/compensation committee determines that the transitioning partners are making satisfactory efforts to accomplish the transitioning of clients.

Assignment of credit to the transitioning partner will not reduce the amount of credit allocated to the retiring partner, unless the retiring partner is not satisfactorily performing the transition activities, as described above.

7. Billable Hours

To allow reductions in billable hours while also providing time to perform the transitioning activities, without penalizing the retiring partner from a compensation standpoint, a retiring partner will be allowed to reduce his or her billable hours during the transition period as follows. Upon beginning of the transition period, the firm’s managing partner will establish the retiring partner’s “standard billable hours” as approved by the management/compensation committee at the inception of the transition period, taking into account the retiring partner’s actual billable hours worked over the five-year period immediately preceding the transition period. For each year during the transition period, the retiring partner may reduce his or her agreed upon billable hours by 10percent of the standard billable hours, without an adverse effect on his or her compensation, so long as the retiring partner is satisfactorily performing the assigned transition activities.

For example, if the retiring partner’s standard billable hours are determined to be 1,600 billable hours a year, during the transition period the retiring partner may reduce the billable hours he or she works by 160 hours a year for each year during the transition period, without adversely impacting his or her compensation, as long as the retiring partner satisfactorily performs the transitioning activities assigned. Provided, however, that the retiring partner’s billable hours in the fifth year of the transition period will not be reduced below 50 percent of the standard billable hours established for the retiring partner. Any reduction to the retiring shareholder’s billable hours in excess of the percentage reduction allowed may result in reductions of the retiring partner’s compensation.

Joel Rose

Joel A. Rose is a Certified Management Consultant and president of Joel A. Rose & Associates Inc., management consultants to the legal profession. Rose has extensive experience consulting with private law firms and government agencies. He performs and directs consulting assignments in law firm management and organization, strategic and financial planning, lawyer compensation, the feasibility of mergers and acquisitions and marketing of legal services.