Some Thoughts on Mandatory Retirement
Marc Rosenberg, CPA
Here are two opposing perspectives on the mandatory retirement question.
Anti-mandatory retirement. A group of partners in their late 50s and 60s, still vibrant and sharp, run a small firm. They make good money, have great clients and love what they do. Assuming they continue to enjoy good health and have no idea what they would do if they retired, why would they agree to be required to retire upon reaching a certain age, say 65?
Sure, they would love to turn the firm over to younger partners who will write their retirement checks, but they are not yet ready to stop working. If they continue to work past 65, the partners reason that the additional compensation they will earn essentially equates to a buyout. Then, when they are ready, they can merge into a larger firm, albeit at a lower price than they would have received had they retired at 65. The value of the firm will most likely be lower, because a firm with older partners will be less attractive to buyers.
Is their tombstone going to say, “Here lies Tom who sadly didn’t believe in mandatory retirement?”
Pro-mandatory retirement. A group of partners has two long term goals:
- To protect the firm’s largest asset, its client base, by providing for an orderly succession of firm leadership and the transition of client relationships to the next generation.
- To attract and retain top talent, who view the eventual transitioning of client duties to them as a promising career opportunity. Top talent will leave the firm if they don’t see these growth and advancement opportunities. Both are critically important to assure the sustainability of the firm.
Eighty per cent of first generation firms never make it to the second generation. One of several reasons is lack of a mandatory retirement policy.
A compromise that many firms make: 81% of firms over $20M and 58% of $2-10M firms have a mandatory retirement policy. The vast majority have a related provision: Partners continuing to work past 65 is subject to annual approval by the other partners. If approved, they give up equity and delay receipt of retirement benefits until a proper notice and client transition takes place. They also accept that the firm decides how what they work on, and how much they work. This is very sensible.
Every firm has a choice. There is no wrong answer. It depends upon the goals of the firm.
To navigate the complex issues of partner retirement, consult our monograph CPA Firm Partner Retirement/Buyout Plans.
6 Comments
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I was wondering if you guys ever saw my previous question?
Buzz – so sorry that your excellent question slipped by. I actually polled 5 HR professionals to respond to your question. But I forgot to send the response to you. My apology.
The question was: what is the size range when a CPA firm should hire a full time HR professional?
I sent this to 5 people; 2 were HR directors of substantial firms and the other 3 were consultants to those firms, with a strong HR focus.
Here are their responses:
•50 people –two people cited this
•75-80
•70
•60-75
Hope this helps.
“Top talent will leave the firm if they don’t see these growth and advancement opportunities.” I totally agree with this statement. When there is no mandatory retirement policy, the partners don’t put much effort into grooming a talent and the top talent leaves. Should we just assume that when there is no mandatory retirement age the ultimate goal is to sale the firm?
Kalia – You ask if a firm has no mandatory retirement, does this mean the ultimate goal is to sell the firm. That’s certainly a possibility. But I think the main goal is this: The partners want their cake and eat it to. They want to pursue three strategies simultaneously: (1) They want the “right” to work as long as they want to because they love working, (2) they want their young stars to be patient and stay with the firm indefinitely, waiting in the wings for their eventual chance to replace retiring partners and (3) if the pursuit of strategies (1) and (2) fail and they have no young people to buy them out when they are finally ready to retire, then they will sell (or try to sell) the firm. But what do they have left to sell? Certainly, not a firm that was as attractive as when the partners were younger.
I feel that when there is no mandatory retirement the partners just want to get the best of all worlds which is simply not attainable unless you really open and honest about your plans. I don’t think if the partners were in the shoes of these young stars they would stay with the firm that has no mandatory retirement but they expect this from others and they are very surprised when someone leaves.
I am a fan of mandatory retirement; or disincentives for staying after a certain age, as Marc suggests. I am also a fan of an early retirement plan (e.g. at age 56-60). I think it “weeds out” partners who would really rather do something else, but stay with the firm simply to earn the retirement benefit.