A Case for Mandatory Partner Retirement With a Soft Landing

Dom Esposito

By: Dom Esposito

Most, if not all, of the Top 10 CPA firms have mandatory retirement provisions in their partnership agreements. For the Top 10, mandatory partner retirement is narrowly defined and means just that – mandatory retirement. With a limited number of exceptions, when a partner at a Top 10 firm hits a certain age, usually 65, he/she must retire from the firm. If a Top 10 retired partner is enjoying good health and wants to keep active, it is not unusual for him/her to join Boards or small and mid-sized CPA firms as Top 10 partner talent, skills and networks are very valuable to these smaller firms.

 

Most, if not all, small and mid-sized CPA firms struggle with the notion of mandatory partner retirements. We understand the myriad of reasons or myths why this is the case but, as articulated below, we respectfully do not agree with many of them. Accordingly, many small and mid-sized CPA firms don’t have mandatory retirement provisions in their partnership agreements. Partners can be partners as long as they have their health and want to keep active. Even for those small and mid-sized CPA firms with mandatory retirement provisions, mandatory retirement is loosely or liberally defined. For these firms, mandatory partner retirement typically does not mean that a partner must retire from the firm at age 65. Instead it usually means that, at age 65, a partner must give up his/her equity in the firm and move to part-time status, in many cases, keeping the partner title.

In Our Opinion

In Our Opinion, the lack of tight mandatory partner retirement provisions, but not necessarily those that mirror the Top 10 firms, is a major reason why so many small and mid-sized CPA firms are merging up into larger firms. At many of these firms, an overwhelming majority of partners who approach age 65 continue to work as partners. Lack of young partners with quality relationship skills cause these firms to seek a transaction with larger, healthier and better managed firms. We don’t think this is healthy. At a minimum, it certainly isn’t the best way to perpetuate the firm.

The purpose of this newsletter perspective is to offer a small and mid-sized CPA firm a solution that provides mandatory retirement with a soft landing. Before we explain, let’s summarize some of the myriad of reasons or myths that many small and mid-sized CPA firms deal with when it comes to mandatory retirement provisions:

  • “I’m an owner in the firm and an owner should not be forced to retire.”
  • “The firm couldn’t survive without me. These younger people can’t bring in business and can’t handle my book.”
  • “I have a good chunk of the equity in this firm and the younger people can’t afford to buy me out.”

Unfortunately, firms that find themselves in this position usually also find that:

  • Many senior partners start slowing down as they get older but are not willing to acknowledge that they no longer are contributing to the firm as they were when they were younger. As a result, they do not want to see their compensation get reduced to an amount that better reflects current value to the firm.
  • Many senior partners do not transfer their client and network relationships in a timely manner. They hold on to everything they built-up over the years, risking that these relationships do not get transferred to younger partners in a timely and methodical fashion. These same partners view their deferred compensation buy-outs as entitlements as opposed to monies that they earned as “good soldiers” which includes transferring client and network relationships.
  • Young stars and future partners look around the firm and see a lot of “gray hair” hanging around and interpret this as an environment that will not provide them the opportunity to become partners. They ask themselves: “Why should I stick around this firm if there is little, if any, chance of me becoming a partner one day?”

Barry Melancon of the AICPA has been quoted in a communication to the Equal Employment Opportunity Commission that: “an accounting firm’s business model has thrived and prospered for decades while serving the public interest and provide for  a predictable progression of lesser tenured, and offer more diverse individuals into the partnership, and facilitate the orderly transition of a firm’s clients from senior partners to those who will succeed them.” We believe that Barry has it right!

Here are our thoughts on how a small and mid-sized CPA firm can require mandatory retirement (in a tight sense) and yet provide partners with a soft landing. In its partnership agreement, the firm needs to stipulate that:

  • There is a mandatory retirement age (65 works best).
  • A partner can earn his/her full deferred compensation amount at age 62 but stay until age 65. Between age 62 and 65, a partner’s responsibilities include the timely and methodical transfer of client and network relationships. A haircut to the deferred compensation amount can occur if the firm concludes that these relationships are not being adequately transferred.
  • At its annual option, the partner could be extended three times as either a partner or consultant. These extensions often are part-time and reflect market compensation.
  • Beyond the annual extension option referred to above, a consulting arrangement (usually at one-third the billing rate) is available to a partner if the firm believes it is beneficial to certain client relationships.

In Conclusion

You may ask if mandatory partner retirement is still legal? The short answer is yes!

While the Equal Employment Opportunity Commission has acted against Deloitte and PwC, it is not clear at this time if the Commission is going to be successful in doing away with mandatory partner retirement. In our view, the Top 10 firms will begin to find it very difficult to enforce mandatory partner retirement as their partners are increasingly becoming employee shareholders rather than partners who have control over their activities and function like business owners. On the other hand, partners at small and mid-sized CPA firms (at least equity partners) do have many more characteristics of a business owner and are therefore exempt from age discrimination rules provided by federal law.

To prevent the loss of their best and brightest talent who seek a path to partnership, we believe that small and mid-sized CPA firms should provide mandatory retirement provisions with a soft landing. Such provisions will also permit adequate time for an orderly transition of client and network relationships.

Reprinted with permission of the author.

Dom Esposito is the CEO of ESPOSITO CEO2CEO, a boutique advisory firm consulting to leading CPA and other professional services firms on strategy, succession planning and mergers/acquisitions. “In Our Opinion” is a continuing series for leading CPA firms where Dom shares insights, experiences and wisdom with firm leaders.