That scenario, or one like it, may strike a chord. For a variety of reasons, retirement activity is on the rise. Boomers, for one thing, are aging. And thanks to plush times in the legal industry, attorneys’ pockets are bulging with cash to fund extra years of post-career activities. Finally, the pandemic that changed everything has increased the appeal of abandoning possibly toxic workplaces by those most at risk of contracting serious illness.
These forces are coming together to create a crisis at law firms that were avoiding the often-delicate task of lining up replacements to handle a departing partner’s profitable matters.
“Very often a law firm’s leaders and shareholders don’t fully appreciate the impact of poor succession planning,” says Timothy B. Corcoran, Principal of Corcoran Consulting Group. “If we were to add up all of the revenue and profit from the senior partners nearing retirement at the typical law firm, it would come to a pretty sizable portion of business. So developing a partner compensation system that facilitates effective succession planning should be a top priority.”
Succession planning needs to occur whatever the age range of a firm’s attorneys. “There are firms I’m working with right now with no succession planning and where the average partner age is over 60 years,” says Russ Haskin, Senior Director of Business Consulting at Wilson Allen. “Many of these partners want to retire, and that causes a crisis.” At the same time, he adds, a succession plan should also address younger attorneys when the situation demands. “There’s a common misunderstanding that succession only comes after the age of 60. But you never know what might happen to, say, a 38-year-old who has a $10 million book of business.”
Many law firm succession plans share a common sticking point: client origination credit. A tool for rewarding rainmaking activity is important for a firm’s success. But origination can also tempt partners to hang onto their credit long after they have stopped working on client matters. Absent the ability to share in the benefits of the origination system, younger attorneys will often opt to pursue their own clients rather than assist those of a departing attorney.
“Effective succession planning and retirement can be a challenge at firms where origination has become a primary driver of compensation,” says Corcoran. “In many cases partners will keep delaying their retirement dates to cling to their credit as long as possible. Sometimes they will even offer to stick around for a while on a part-time basis, working with key clients to ensure they do not leave for another firm. At the same time, of course, the attorneys continue to collect their origination credit.” When compensation plans limit opportunities for collaboration, partners may also be tempted to dabble in areas beyond their expertise to avoid sharing credit with others.
“Effective succession planning and retirement can be a challenge at firms where origination has become a primary driver of compensation. In many cases partners will keep delaying their retirement dates to cling to their credit as long as possible.”
Such a system can harm everyone concerned. The firm risks the loss of profitable clients. Younger attorneys are denied the opportunity to establish productive relationships with veteran clients and miss the rewards that would come from attracting new matters. And clients are shortchanged when their needs are not fully understood by attorneys with whom they have not established significant relationships.
“Clients have choices,” says Lisa Smith, head of the Washington, D.C., office of Fairfax Associates. “They will look to other firms if they see their primary relationship partner getting close to retirement and no trusted individual taking over their matters.” The problem is worse if the client’s interactions have been primarily with one attorney, she adds. “Even if many people have worked on a client’s matters, they haven’t necessarily been seen other than as names on bills.”
Most consultants agree that client origination credit is a necessary motivational tool. “Maybe 10% or 15% of all partners have the ability to repeatedly develop high-quality clients,” says Blane Prescott, Managing Shareholder at MesaFive. “Many can do it one time and others are good at retaining clients once they have been gained. But true rainmaking ability is pretty rare. That’s why the market pays so much for it.”
The question is not so much “Should we eliminate client origination credit?” but rather “How can we modify the compensation system to benefit partners in ways that more accurately reflect the variety of their contributions?” An effective system rewards attorneys for hunting in packs, collaborating and delegating. Such practices can give a firm greater stability with clients and demonstrate the depth of its bench.
Even so, experiments in sharing credit among all participants in a client’s matters often fail. “Team-based plans tend to discourage the highest performers,” says Prescott. “If they feel they are not getting the recognition they deserve, they leave for other jobs.”
Part of the solution may be to share credit between the originating partner and the next partner taking over the account for the short period of time during a transition. For this to work, though, the outgoing partner needs to be confident that their compensation will not be negatively impacted if they transition some of their credit. That can be achieved by a system of multiple criteria for which partners get compensated.
“Clients have choices. They will look to other firms if they see their primary relationship partner getting close to retirement and no trusted individual taking over their matters.”
“As long as a compensation system is not formulaic, there’s plenty of flexibility to reward people,” says Smith. A senior partner’s compensation can hinge on performance in parameters such as retaining firm revenue by training and developing people, team building and mentoring, and helping maintain client relationships by passing work along to younger partners.
The transition from an exclusively origination-based compensation system to a blended one can be done gradually. “Many firms set out a three-year phase-down program calling for partners approaching retirement to reduce their origination over time without negatively affecting their compensation,” says Smith. “That requires establishing clear key performance indicators for what they should be delivering.”
With such a system in place, the law firm might even begin treating client origination credit as a one-time event, which sunsets and is never inherited. Many industry observers champion this approach, combined with a shift toward rewarding partners for bringing in new work rather than new clients.
“Matter origination can persist for a long time and can be earned by multiple people, including the original partner who brought in the work or someone down the line,” says Corcoran. “This gives the firm more flexibility in the allocation of credit for generating and keeping work.”
Whatever the modification to a firm’s compensation system, an early start is essential.
“Many firms approach succession only when a key individual hoarding a massive book of business is coming up on retirement,” says Haskin. “They end up panicking and doing a rushed succession that doesn’t make anyone feel good.” Haskin encourages firms to get ahead of the process, approaching succession with a large-scale view that sets expectations across the whole firm. “The originators should know what will happen when it comes time for them to move on, and the next level generation should see an avenue forward.”
Moving slowly can also assuage fears on the part of senior partners who feel threatened by change. “Sometimes there’s a concern that touching the compensation plan will create political turmoil,” says Corcoran. “It doesn’t have to be that way. A firm can make modest tweaks to reward certain behaviors without hurting anyone. And it doesn’t have to be a matter of robbing Peter to pay Paul. If the firm rewards behaviors that increase profitability, the increased funds will be there to pay the rewards. The pie gets bigger, and the exercise becomes self-funding.”
“Many firms set out a three-year phase-down program calling for partners approaching retirement to reduce their origination over time without negatively affecting their compensation. That requires establishing clear key performance indicators for what they should be delivering.”
Slow, but not too slow. The firm also needs to avoid procrastination and start early with modest steps.
“Proving that another reward system can be more profitable than the traditional one before making the required changes is never going to work,” says Corcoran. “We’ve got to flip it around by saying, ‘Let’s change the reward system to encourage and drive the behaviors we want, and that will lead to better economic outcomes.’”
He acknowledges some attorneys will decide to step off the stage as they see the world changing. “But others will say, ‘I’d love to adapt. These are the kinds of things I would have loved to have been doing all along. Finally, here is a system of rewards necessary for the firm’s success.’”
An effective succession plan will not only attempt to balance the needs of the firm and the departing partner but also include input from those loyal individuals whose patronage has kept the firm going.
“Usually, clients aren’t even included in succession planning,” Haskin says. “Everyone sort of forgets about their vital voice in the topic.”
The firm should encourage them to communicate their concerns about the future of their involvement when a trusted adviser departs. “Clients will feel a lot better about staying with a firm when they are confident that the firm is prepared to take on their matters.”
The COVID-19 pandemic, changing demographics and increasing competition from alternative legal service providers have come together to cast a harsh light on the otherwise invisible seams in the traditional procedures of compensation and succession. Now is the time for law firms to modernize those procedures for a new era.
“Much of how a typical law firm operates is based on a system of choices made long ago and perpetuated for decades,” says Corcoran. “But those choices are optional. Law firms are starting to realize their systems are rewarding the behaviors of yesterday when they should reward the behaviors of today.”