With the FTSE 100 at a six-year low, an uncertain property market and pension plans in tatters, partners can no longer expect, or afford, to retire at age 55 or 60. The effect on traditional partnerships will be dramatic as partners who had thought their retirement plans were sound now realise that they will have to remain in practice for much longer, if their partnership agreement will allow them to.
Obviously, if fee income remains static, more partners mean lower per capita earnings. However, if a points system is used which rewards immovability rather than income, partner remuneration may become heavily biased towards a nucleus of ageing, unproductive and potentially disengaged partners, rather than those who are actively involved in business development, client service or practice management. This is clearly untenable, yet the alternative – an objective, performance-based remuneration system for partners – is far removed from the culture of the majority of UK firms.
Many worry that today's economic uncertainty may be the model for the foreseeable future. If correct, the next few years could be extremely challenging for the legal profession, as firms struggle with an unprecedented set of client, financial, HR and operational issues that would be exacerbated if firms decided to find space for loyal partners who could not afford to retire.
Three allied subjects are equally difficult to address. How do junior partners and professional staff deal with a reduction in available partnership openings? What happens to client service when lead partners can't, or won't, retire? And should managing partners use a downturn in business to concentrate the firm's equity in fewer hands?
Partnership is the goal for the best and brightest professional staff, and if that opportunity disappears, there is no incentive to stay with a firm. High staff turnover is difficult to manage in any sector, but especially disruptive in professional services. Rising stars need partnership opportunities just as much as firms need the next generation of partners to successfully shape their futures. Similarly, client requirements continually change, so client service must be regularly revitalised by new partners with new skills and fresh perspectives.
So what can be done to balance the age profile and remuneration spread within a partnership? First, firms should review their reward systems to implement sensible partner remuneration arrangements and to ensure that professional and support staff are properly rewarded. This may involve the changes of roles within a firm, putting people where they can achieve most for a practice. These measures will help stabilise the firm's long-term financial performance. However, this strategy will be painful for many firms as it will force them to adopt remuneration systems based, at least in part, on individual results rather than on endurance or collective performance. It will also drive home the need for external help in developing efficient financial systems, the most tax-efficient structures and the like.
Practice management will become the domain of the able rather than the survivors. Managing partners will be those most fit to lead a profitable business in the future, supported by an expert, multi-skilled team. Will all of these people be partners? No, because it will be impossible for partners to have the requisite experience and skillset. The role of senior partners will change dramatically, with tough choices made about fee income, full or part-time roles and commensurate earnings. Giving way to the éminence grise will segue into the recognition of excellence at all levels. Unproductive, uncooperative or incompetent partners who previously might have been carried until retirement will be quietly encouraged to work part-time, become consultants or retire on a smaller pension. Personal hardships can be recognised, but not at the expense of the viability of the firm.
Finally, whatever their level of seniority within the firm, partners should conduct a thorough review of their personal financial planning to identify their future pension requirements and to plan their investments accordingly.
Hard times require clear vision and a steady hand.