Transitioning Clients and Considerations in Setting Compensation for
by Joel A. Rose
Partners Approaching Retirement
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 towards retirement, without being penalized from a compensation standpoint.
- 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.
- 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.
- 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 to insure 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.
- 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 latter 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 determine whether the retiring partner is performing the transitioning duties in a satisfactory manner.
- Setting the Retiring Partner’s Compensation
Generally, the compensation of those partners who are transitioning towards 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 by the managing partner and the management/compensation committee in setting the retiring partner’s compenstion, and the compensation may be increased or reduced appriopriately.
- Dual Credit for Client Collections
In order 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.
- 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 10% 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, in the retiring partner’s standard billable hours are determined to be 1600 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% 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.
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