Transition of Managing Partner Compensation

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Law firm succession and transition often begins with a focus on individuals age 60 and over and their evolving role over the remaining years of their career. Today let’s focus on one position where a younger partner is more and more likely to find him- or herself — Managing Partner.

Managing partner used to be the final act. Retirement afterwards was common. But today we see more and more fifty-something managing partners who are ready to step down from that post, having held it for five to ten years. At this early age, most do not seek to leave their firm or the practice of law. Yet for many, particularly those who have left the practice for ten years to serve the firm’s interests, the return presents some challenges and questions. One of those questions is: “What happens to my compensation?

The common refrain on this (if there really is one) is one year of protection for every two years as managing partner with up to three years protection of current compensation. We prefer a slightly more nuanced approach to this: One year of no downward adjustment from the average of the last three year’s compensation position for each two years as managing partner up to a maximum of three years protection. Position is different from compensation. Position considers where the managing partner has been compensated relative to average, top, median and entry level partners. The protection seeks to maintain the “sustained position” (hence the average of prior three years) as a floor for compensation of the managing partner during the post-managing partner protection period. It does allow for the compensation to go down if the overall profitability of the firm declines, which we hope many would find a reasonable position. After all, one is still a partner – a co-owner of the enterprise – along with all of the other partners.

But when a specific program is being developed, the standard formulation or even my twist on it becomes a bit tricky unless the firm just wants to provide an unencumbered entitlement to the departing managing partner (which may be fine as well, if it is deliberate). We believe there is a more fundamental question: “What do you do with a managing partner, when he stops being a managing partner?”. The answer to that guides you on the answer to the program specifics. And the answer to our question is driven by a number of variables: firm size, incumbent age, firm governance charter, practice area, clientele and the like. What might make sense for the 70-year-old managing partner of a ten-partner firm who is retiring at the end of term may make no sense for the fifty-seven-year-old managing partner who after ten years as managing partner of a two hundred partner firm is very much interested in returning to the practice of law.

So, it is helpful to engage in a dialogue about the following. The exact wording and scope will vary depending on the answers (some of which may already be well known by all parties).

-- Is this compensation program/agreement for someone about to step down from the managing partner role or is a new candidate requesting it before signing on for the job?

-- How old is this person?

-- How long has the managing partner been in the position?

-- Was the position full-time resulting in the turnover of most client relationships and nearly all daily law practice? If not, how much did the managing partner position intrude on practicing law, business generation and market presence?

-- What kind of practice and client following did this person have? How permanent was the client relationship transfer?

-- How visible was the position in the market (i.e. did it have a high-profile public CEO face or was it more of an internal COO orientation)?

-- What is the leadership/advisory role of an ex-managing partner upon leaving the post (is there any transition, formal or otherwise expected of this person)?

-- What kind of compensation program is used for the general population of partners?

-- What compensation program was used for the managing partner's tenure in the role?

-- What does this person want to do? We know the managing partner often says that he/she wants to return to the practice of law, but there are varying degrees of that statement and it helps to understand what each side is thinking.

The best program is one that works to meet the managing partner's and firm's interests and considers the challenges and timeframes to transition from the formal leadership role of managing partner into the next role — whatever that may be.  


James D. Cotterman is a principal with management consultancy Altman Weil, Inc.  He advises law firms on compensation, capital structure and other economic issues, governance, management and law firm merger assessments.  Contact Mr. Cotterman at jdcotterman@altmanweil.com.

 

An earlier version of this article appeared in his blog, Cotterman on Compensation. 

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