Should Retired Partners Take Staffers with Them?

Is your plan upside down?

By Bill Reeb and Dominic Cingoranelli
CPA Trendlines / Succession Institute

We’ve seen that other firms frequently have seen negative situations occur when they don’t address them up front in their firm policies or agreements. This question addresses whether firms are proactively preparing for these occurrences.

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We asked, “Which of the following occurrences will force a change in the payment duration, monthly payment amount, and/or total payout amount of standard calculated retirement pay?”

Answer % in 2012 % in 2008 % in 2004
Competing with the firm after retirement 74% 53% 56%
Taking staff 43% NA NA
Early retirement 42% 36% 31%
Egregious misconduct in the community 26% 21% 13%
Uncollectible Accounts Receivables or Work in Process 21% 17% 17%
Sale of the business 14% 19% 14%
Merger 10% 13% 9%
Loss of retiring owner’s clients at any time during the payout period 13% 10% NA
Loss of retiring owner’s clients only within the first two years 9% 12% 24%
Loss of retiring owner’s clients only within the first year 7% 12% NA
Liabilities incurred after retirement based on retiring owner’s clients 9% 7% 6%
Sale of a line or business 1% 4% 2%

 

In a positive trend, 74 percent of participating firms indicate that competing with the firm after retirement will result in a change in the retirement benefits, compared to just over 50 percent in past surveys. But only 43 percent of the firms said that a retired partner’s benefit will be affected by his or her taking staff when they leave.

Given the importance of finding and retaining quality staff to every firm, why would any firm put their top people at risk without at least some financial consideration should a past owner woo them away, especially while the firm is paying them a retirement benefit for the value they are leaving behind? By the way, for the record, when owners leave and take clients and/or staff, they normally take the best of each.

Just as bad, only 42 percent of the firms indicated that early retirement would result in an adjustment to a retiring partner’s benefits. We not only believe that an effective policy in this area should have a tiered vesting schedule that reduces the retirement benefit for leaving early, but that the early vesting privileges should only be accessible with a minimum of two years’ advance notice.

Remember that one of the central reasons for bringing in younger partners is so they can buy out the senior partners when it is time for them to leave. In many cases, we find poor policy design in this area that actually will allow the younger partners to leave before the older ones, thereby turning the succession plan upside down. The good news is that there is an easy fix to this as long as you put it in place years before a partner is ready to retire. When you consider some of the major issues introduced here, such as:

  • Competing with the firm after retirement
  • Taking staff
  • Early retirement
  • Egregious misconduct in the community
  • Uncollectible accounts receivable or work in process
  • Loss of retiring owner’s clients if improperly transitioned or if purchased on a retention policy

our question is simply “Why aren’t all of these responses close to 100 percent?” rather than the group of them currently averaging about 30 percent.

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