Don’t Let Retiring Partners Double Dip
Marc Rosenberg, CPA / Jun 17, 2020
Here’s a question that frequently arises in my consulting engagements:
What are your thoughts on partners wanting to work for the firm in a non-partner role after they retire, who continue to control “their” clients while receiving deferred compensation and a salary for their work?
The answer is rooted in the maxim: “No transition…no goodwill.” This means that retired partners should not have the inalienable right to deferred comp without actively and effectively transitioning their clients. If they don’t transition, then the remaining partners, at their sole discretion, should be able to reduce the deferred comp payments.
I would also add this: Firms are free to do whatever they want in writing their partner agreements. If the partner group decides that they want to give themselves the freedom to continue working their client base, with little or no transition AND pay deferred comp to retired partners AND continue to compensate them at a partner level, that’s their prerogative. But in my opinion, this is misguided. Unfortunately, I have seen a number of founding and/or power partners bully the other partners into agreeing to this one-sided and thus, dangerous arrangement.
A Typical Retirement Transition
- The partner gives notice, which these days, is 18-24 months prior to retirement.
- During the notice period, the partner actively and effectively transitions clients.
- Ideally, the firm has in place a written client transition policy, which is closely monitored by the firm’s management. Assigning clients is primarily a firm decision, not a decision of the partner, though the partner can make suggestions.
- Partner retires on an agreed-upon retirement date.
- If partners wish to continue working, it is at the firm’s annual discretion. The firm decides how much they work, what work they perform for which clients, and what their comp will be.
- Comp for retiring partners is usually decided on a case by case basis and is commonly 35-40% of the collected billable time (hours x rate) worked by the partner. The partner is eligible to earn the same commissions for bringing in business as the firm offers its staff. It’s very unusual for retired partners to be compensated for non-billable time.
The main reason for making deferred comp payments to retired partners is to “acquire” their clients. If a firm knew for sure that they would lose the clients of a retiree, I doubt that deferred comp payments would be made. Failing to transition clients in a retirement scenario means that the firm gets nothing in exchange for the payments, which is neither a fair nor reasonable arrangement.
Paying deferred compensation to a “retired partner” who continues to control clients and opts out of client transition is the CPA firm equivalent to “double-dipping.” No one likes double-dippers.
Crafting a buyout plan that is fair to all parties – the retiring partner and the firm – requires careful thought and oversight. Consult our guide: CPA Firm Partner Retirement/Buyout Plans to make sure all the expectations are crystal clear.