Mandatory partner retirement and succession planning is a hot issue

Source: INSIDE Public Accounting (IPA)

As firms struggle with the balance of retaining quality employees, tapping into the talent of the partner group, and ensuring that opportunities are available for younger staff to move up in the ranks, the question of partner retirement - when, how and whether it should be mandatory - becomes increasingly important.

The concept of mandatory partner retirement can be a touchy subject throughout the profession. If a partner is healthy, profitable and can maintain a normal workload, is it appropriate for that individual to be forced into a buyout situation based on a mandated age?

The overriding rationale behind mandatory retirement policies is to attract and retain top talent. Ivan Brown, founding partner for WithumSmith+Brown of Red Bank, N.J., credits his firm's growth and success to low turnover and staff longevity, "which is directly linked to the career opportunities and upward promotions we have offered since our inception in 1974. Younger managers view the transitioning of client responsibilities to the next generation as a big plus and an integral aspect of their opportunity to become a partner."

Brown points out that his firm addresses the succession issue by requiring that younger partners be part of a client service team. This way, they learn from more knowledgeable partners. Concerning his firm's retirement timeline, Brown tells IPA that mandated retirement by age 65 "allows for the transition of clients to the next generation of partners. In addition, having retirement payments commence by age 65 allows for the timely payment of the retirement benefits."

The two keys to a successful partner retirement policy are timelines and buyouts. The timeline allows firms to enable the transfer of wisdom down to younger senior managers and partners, while the buyout gives the retiring partners access to benefits such as pensions or stock options.

The three firms IPA spoke with offer retiring partners a separate signed agreement that allows them to continue working with the firm with a reduced workload and a revised compensation package. Such agreements give successors additional time to tap into a retiree's wisdom and experience.

Bob Gallagher of Pittsburgh-based R.J. Gallagher & Associates, Inc. believes the mandatory retirement issue is more of a problem today than it was 20 years ago. He explains that in the past 20 years, the profession has become more knowledge-based, requiring partners to specialize in fields such as business valuation practices and litigation support. Firms with fewer than eight partners are more negatively affected when they lose years of experience and specialized knowledge when a partner retires. This loss isn't as dramatic for medium and large firms because they have a broader knowledge base to draw from.

Gallagher sees a need for firms, especially with less than eight partners, to revisit their partnership agreements in light of the current knowledge-based environment. For example, he recommends that firms extend the end date for mandatory retirement from age 65 to 67 and allow for partners to work on a part-time basis after they retire for at least two years. He also recommends that partners be required to give at least two years' notice of their intention to retire earlier than that, to ensure a smooth transition with clients and to ensure the knowledge is transferred to the next generation. The plan should include a penalty if a retiring partner fails to develop a successor. "How can you make payments to a retired partner when the related business evaporated after the partner retired?" Gallagher tells IPA.

"More partners will be retiring in the next 10 years than did in the last 30 years combined. Many managers and seniors are lacking the skills needed to thrive today so firms will have to revisit their owner agreements, making succession planning even more critical. Medium-size firms will make a concerted effort to focus on transferring firm knowledge and experiences to the next generation of personnel and capturing it for reuse." - Bob Gallagher, IPA Feb. 2007.

Henry South, MP of Atkinson & Co. in Albuquerque, N.M., notes that 20 years ago, firms often "kicked out" retiring partners while the younger staff waited eagerly to be promoted. But he doesn't believe this is the case today. "What my experience has been with retiring partners, they don't all want to go away," he says. He estimates that, in his experience, 80% of retiring partners don't continue working, even in a limited capacity, but the rest "stick around and help."

A&Co.'s founding partner, Jerry Atkinson, retired about eight years ago at age 57. He left the firm earlier in the retirement timeline so he could tend to his ailing wife. The firm cut a deal so that he could continue working, South says. And Atkinson continued to work part time at the firm for a few years after his buyout. He has since fully retired and now lives in Texas. "I would like to have had him stay around longer," particularly during the tax season, South says of Atkinson.

A&Co. currently has five equity partners and four non-equity directors. Although the firm has a provision that requires a partner buyout by age 65, A&Co.'s full-time staff includes Herman Rauch, 86, a former partner of a firm that merged into A&Co. He continues to work more than 40 hours a week. As South notes, Rauch deals with "a lot of trust companies, with people who need hand-holding, with a lot of older people." Rauch's specialty is elder care, "a good niche for him," South tells IPA.

Two years ago, A&Co. purchased Rauch's firm where he was working under a special arrangement. He continues to work under that same arrangement with A&Co., and is compensated with a percentage of his billings. South says Rauch's current title is client administrator. He's "more like a senior manager as opposed to a shareholder," South concludes.

Stephen Mayer, founding partner of Burr, Pilger & Mayer, in San Francisco, notes that clients rely on consistency, and their mandatory retirement policy contributes to that consistency. "In our case, the people who have retired continue to work on a part-time basis, and they enjoy it," he says. "It works well for the partners, and it doesn't clog up the promotions." Of the five partners who have retired over the past years, Mayer says, four are still working for the firm on a "gradual" basis. The minimum requirement for active BP&M partners is 2,500 hours annually; when a partner retires, that number is cut by 80% or more.

Labor attorney David Swider, a partner at Bose McKinney & Evans law firm in Indianapolis, explains that the legality of mandatory partner retirement hinges on whether the partners are seen as stakeholders and policy-makers or as salaried employees. The Age Discrimination in Employment Act of 1967 is straightforward in that it protects individuals age 40 and older from discrimination.

"The law is more complex, however, when it comes to issues of partnership status versus employee status," Swider says. "In evaluating whether a partner is protected by the Age Act - and thus cannot be forced to retire at any age - the question often comes down to the degree of ownership control the partner actually has over the operation of the business. If a partner is one in name only, more akin to an executive employee than an owner, the courts may well find him or her entitled to the protections of the ADEA and legally immune from forced retirement absent a sizeable non-forfeitable annual retirement benefit from a pension, profit-sharing, savings plan, or deferred compensation plan," according to Swider. Mandatory retirement plans can be an effective tool to help a firm deal with transition issues, but should address all legal issues in order to be compliant.

Make sure your firm participates in the upcoming INSIDE Public Accounting 2008 Annual Survey. IPA names the Top 100 CPA firms, the "Best of the Best" firms and the "All-Star" firms each year. If you'd like to be considered for any or all of the designations, please contact The Platt Consulting Group at 317-733-1920 for inclusion in the upcoming annual survey! Be the next firm to debut on the INSIDE Public Accounting lists. Find out more at: www.plattgroupllc.com/2008survey.

INSIDE PUBLIC ACCOUNTING - (ISSN 0897-3482) The Competitive Advantage For Accounting Firm Leaders. IPA is the profession's authoritative independent newsletter for reporting and analyzing news, trends, strategies and politics. © 2008, The Platt Consulting Group, LLC. All Rights Reserved. www.plattgroupllc.com


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