A long term incentive

Our 22nd Annual Law Firm Survey highlighted that attracting and retaining the right people is the number one challenge within professional practices.

While there clearly needs to be focus on the employees, what are the tactics that can be deployed to attract, incentivise and retain partners?

The answer may lie in the corporate world.

The traditional partnership model, which has served professions so well over the years is one of ‘naked in, naked out’ – i.e. a partner who injects capital when they are appointed, will withdraw the same amount on retirement and not benefit (or suffer) from any change in the value of the firm over their time as a partner. In a traditional small partnership, this made sense as each year the profits would be added up, allocated to the partners and then everyone started again.

However, on the (key) assumption that all of the partners stay with the business, together the firm does have some value that should increase over the years if the firm grows. For the larger firms, who are investing in achieving recognisable brands along with investment in enhanced systems and IT capability, this increase in value over the life of a partner could be significant.

In a company context this would mean that the ‘shares’ held by the partner would increase in value over their lifetime and when they retire they would sell their shares at an enhanced value. Through the increasing use of external investment in professional practice firms, increasingly partners are being rewarded and incentivised through the use of shares that can increase in value.

However, even without the existence of external investment, models are now starting to emerge where the firm is valued, say on an annual basis and partners can see how their stake in the firm is growing. The firm may then decide to offer ‘share options’ in the equity to partners who have demonstrated high performance. This not only acts as an incentive to perform at a high level, it also acts as a retention tool as the partner’s options may not crystalise for several years and they would lose the benefit if they left the firm.

Moving to such a model is perfectly feasible in an LLP entity. It is not without its consequences and should be carefully thought through, but in an environment where firms wish to retain their key partners and partners should have a key eye on how they save for their retirement, it is perhaps no surprise that we are increasingly talking to firms about moving away from the ‘naked in, naked out’ model.

“Happiness is not ready made. It comes from your own actions” Dalai Lama

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.