Mandatory retirement is a hot button issue for many law firms. All would prefer that older partners leave law practice when their willingness or ability to contribute to the firm’s success has run its natural course. Making retirement compulsory at a certain age can help accomplish this objective, depending on a firm’s compensation and ownership model, and the method of voting stated in its partnership or shareholder agreement. But mandating retirement based on age can seem arbitrary to partners who aren’t ready to stop practicing. The tactic can help regulate Baby Boomers’ gradual exit from their law firms to make room at the summit for the next generation, but often works best as part of a larger bundle of tools for ensuring fair and equitable succession.
When an unproductive partner shares in firm profits, friction with productive younger partners is sometimes unavoidable. The next generation of lawyers typically argues that profits should be distributed, and firm ownership percentages should be determined, based on the value a partner has generated relatively recently. An older partner who once was productive, and now is not, may continue to receive a share of the profits disproportionate to the partner’s contemporary performance. The next generation may argue that this robs hard-working younger partners of the fruits of their labors yielded by what they consider their more neoteric efforts. This can be anathema to older partners. They may contend that they paid their dues, and are entitled to reap the rewards of years at the helm – by taking a lion’s share of profits – based on historical performance, even if this creates a drag on firm growth and profitability now.
There is a lot at stake in this dialogue. Unhappy junior partners who produce substantial revenue are a flight risk. If enough of them leave, profits sag. If the rest of the partnership cannot replace the revenue they brought in, the firm may contract severely or fold. But often, a firm’s success over time is directly attributable to the sweat and blood of its senior partners. If they are not rewarded for this important work, even if rewards extend into a period when they are less productive, the firm may be a less attractive investment opportunity for lateral candidates looking for a place to spend the rest of their careers. Talented associates and junior partners, seeing how older partners are being treated, will recognize that this is the treatment they can expect when their time comes to bow out of the profession.
Some firms sidestep this confrontation by having mechanisms for pushing out unproductive partners at any time, making retirement age irrelevant. The obvious example is the firm that bases partner compensation and ownership solely on the prior year’s collections (the “eat what you kill” model). At such a firm, partners are paid, and their ownership shares adjusted, annually. Unproductive partners are quickly weeded out, and mandatory retirement is unnecessary. It can be more challenging to build loyalty and promote partner longevity at such firms, because past contributions and subjective value are not recognized.
Other firms have no mandatory retirement provision at all. Partners practice until they are ready to leave. If older partners are still productive, and leave voluntarily (of their own volition, or when their compensation is cut based on reduced performance), this system often works. But if younger partners perceive these older partners as obstacles – either because they horde their clients and don’t transition them to junior partners, or because they block firm investments in future growth (such as marketing, technology or lateral acquisition) – then retirement at will can provoke disputes that could have been averted had retirement at a particular age been mandatory.
Many firms adjust partner compensation, firm ownership and partner capital accounts as a partner’s productivity rises and falls over some period of time, on a cycle determined by the firm’s compensation and ownership models. Often, these firms compensate partners and determine their ownership shares based on a combination of multi-year performance and subjective factors, so that money and shares adjust less often. Mandatory retirement is not strictly necessary, because the firm can remove unproductive partners based on their current and recent-year contributions.
But pushing out a partner, especially one who has been around a long time and performed well in the past, is stressful at best and divisive at worst. Making retirement compulsory based on an objective metric – age – can mitigate this stress. Management need not go through a process to ease a poor-performing partner out the door. When the partner reaches retirement age, the partner’s career is over. If a firm wants to keep high-performing partners as they reach mandatory retirement age, it can have a mechanism for waiving the requirement, allowing these partners to keep practicing as long as they are productive.
Sometimes, a firm’s largest producers do not want to be told when they must retire. If their partnership agreement gives them votes based on their percentage of firm ownership, they may be able to kill a mandatory retirement requirement. If voting is per capita (one-partner, one-vote, regardless of ownership share) and they cannot muster the votes to get rid of compulsory retirement, these high-performing partners may simply leave for firms that won’t require them to retire. Under these circumstances, a hard-and-fast mandatory retirement provision can drive off big producers who want to keep working. A waiver provision, or doing away with mandatory retirement altogether, may avoid this undesirable outcome.
No hard and fast rule works for all firms. I once reviewed the partnership agreement of a major San Francisco-based firm that required all partners to retire at age 55 – no exceptions. The great majority of firm revenue was being generated by partners in their 40’s. They wanted the generation that had founded the firm to retire, but needed to keep the storied firm name for brand recognition. So they made retirement at 55 mandatory, thinking that they would vote on the issue again when they got to their 50’s. A few years later, they removed mandatory retirement entirely. In this instance, compulsory retirement was not part of a long-term strategy for achieving a healthy transition from one generation to the next – it was a tool for pushing out founding partners.
Mandatory retirement can drive a wedge between firm generations if used to disenfranchise older partners who, having deferred part of their compensation, earned the right to coast into retirement. It is a device best used as part of a larger strategy for transitioning senior partners out of law practice before they become a drag on a firm, once these partners are fairly rewarded for their often-significant past contributions.
