It should come as no surprise that many of today’s successful small to medium-size law firm founders are Boomers who are retiring in unprecedented numbers. These leaders hope to cash out and enhance their retirement nest eggs through either buyout payments from younger partners, or contractual post-retirement formulaic obligations that resemble pension payouts.
How Did We Get Here?
Back in the day when the firms were founded, and the money started pouring in, it seemed reasonable that when the founding partners started to retire, they should receive some kind of compensation from those lawyers remaining.
After all, didn’t they deserve something in return for past sweat equity and the substantial goodwill that they built? It would be unfair for their successors to take the fruit of their labor as a gift. The younger lawyers shouldn’t mind paying. Didn’t the founders provide the opportunity for their current success?
The Train Wreck is Coming
Let’s play this out. The first retirement comes, a beloved partner departs, and the payments begin. Few of the remaining lawyers give it a second thought. They think:
“The amounts going out the door don’t seem too bad in the scheme of things. And hey, I’m only 15 years away from retirement. Seems like a pretty good deal for me in the future. And besides, it’s probably not too politically astute to raise the issue. After all, everybody loves the guy.”
But inevitably, time passes, and the second and third retirements come to pass. The payments to these subsequent retirees overlap with the first retiree’s payments. Perhaps one of the two new retirees is less beloved than the first. Some remaining younger partners wonder how the firm can afford to make the generous payments when retirements number four and five occur. The train is coming down the track.
Other Consequences
As the rumbling of the train barreling down the track grows louder, other consequences of the retirement compensation scheme take shape. None are good.
The firm can’t hire attractive laterals. Why would a lawyer join a firm that has a liability to people he or she never knew, and which would inevitably lessen their potential compensation?
It gets worse. The remaining partners feel the impact of the payments more and believe that their income is now below market. They start to look around and see if the grass is greener at another firm. For some, it appears to be, and they leave.
Now it gets really bad. Revenues drop even more, and retirees and partners now fear they must take a haircut to keep the firm afloat. Then someone mentions a merger to save the day, but what firm would want to assume that kind of liability? No firm with any reasonable business sense.
Finally, the firm dissolves. Everybody loses.
Doesn’t This Sound Like Some Recent Big Law Scenarios?
Indeed, it does. One of the main reasons Stroock & Stroock & Lavan could not find a merger partner was its unfunded obligations to retired partners. When merger efforts failed, lawyers fled. The firm ultimately dissolved in late 2023. Shearman & Sterling is another example. That firm had to substantially change its previously generous retirement obligation before it was able to conclude a merger with Allen & Overy that occurred just this last year.
What To Do?
The problem, in a nutshell, is modifying the liability in a way that is fair to retiring partners who built the firm, affordable to remaining partners, and that doesn’t impede recruiting.
There is no easy answer. The choices are not particularly attractive.
Eliminate the Retirement Compensation Policy
Going “cold turkey” is perhaps the simplest way, but it is the rare law firm where the political environment to do so would support such an approach, or that has a strong leader to pull it off.
Phase It Out
There are lots of ways to slice and dice this. It can minimize the problem and is probably easier to accomplish politically than eliminating the retirement compensation policy in one fell swoop. However, the problem doesn’t go away until it is completely phased out.
Buy It Out
Bite the bullet now and suffer lots of short-term pain. It would be easier to do this if the already-retired and soon-to-be-retired partners took a haircut. There are political challenges here, but a plan can be carefully negotiated and implemented if reasonable minds prevail.
Take a Second Look at Soon-to-be Retiree Compensation?
While we’re at it, the time may be ripe to re-examine senior partner compensation. The key to all compensation plans is having proper incentives. A firm’s compensation plan should reward the desired behavior of its lawyers. But can the formula that rewards the appropriate behaviors for a 45-year-old partner work with a 60-year-old partner nearing retirement?
When partners near retirement, a critical desired behavior is the transition of clients. There is no one-size-fits-all solution to compensate senior lawyers best to do that. Suffice it to say that flexibility is key. The strength of the lawyer’s relationship with the client, the existing team that serves the client, and the client’s preference will vary and will all impact the ease of transition.
The Challenges and Risks
There are many. In most firms, origination credit drives whatever formula a firm has. Senior lawyers hesitate to relinquish or share the credit with younger lawyers, preferring to maximize compensation during their twilight years. Younger lawyers hesitate to invest time with those firm clients where the monetary rewards for that investment of time are minimal. Some lawyers may even leave for firms whose compensation policies seem more equitable.
Sharing credit is a common solution at some firms, but even that approach has risks. Share too much of the pie with younger partners, and the senior lawyers may look for and find firms more than happy to pay them handsomely for a brand new roster of clients.
Oh, and don’t forget to ask the client about their lawyer preferences. Selecting a junior lawyer who worked on a client team as a successor relationship partner is doomed to fail if the client has no “comfort and chemistry” with that lawyer.
The solution is a subjective compensation structure for senior attorneys’ last years. It needs to consider the long-term best interests of multiple players, including the client, the firm, and the impacted senior and junior lawyers. New metrics may even need to be created. Aligning all of the parties’ goals is no easy task. But it's doable if the firm can “walk the talk” of its so-called collegial and collaborative culture. If it’s all talk, good luck.
Conclusion
The compensation problems surrounding already retired partners and soon-to-be-retired boomer lawyers are difficult to solve. However, they are usually predictable and can be nipped in the bud with careful and thoughtful planning. Many firms, even though they see the train wreck coming, put their heads in the sand and do nothing. When the train arrives, and it will, the firm’s future will be seriously jeopardized. In contrast, those law firms that take a proactive approach will emerge stronger in the marketplace because, unlike their competitors, there will be no need for damage control.
