Feature

posted 25 May 2006 in Volume 9 Issue 1

Age Discrimination Regulations – a different point of view?

Although amendments to the Age Discrimination Regulations suggest that the lockstep system in law firms is safe, there is still plenty for partnerships to consider before the regulations become law in October 2006.

By Rowan Williams, partner, BDO Stoy Hayward

In just a few months it will be illegal to discriminate against people at work on grounds of age. Heralded as the biggest change in employment rights since the Disability Discrimination Act ten years ago, the Age Discrimination Regulations are set to come into force in October 2006.

The new regime will ban age discrimination in promotion, recruitment and training; outlaw unjustified retirement below the age of 65; and remove the age limit for unfair dismissal and redundancy rights, although the current age-banded system remains.

While much has already been written about the content of the regulations, the main concerns for professional partnerships seem to be the challenges to the lockstep system of profit sharing and compulsory retirement age.

Amendments to the original drafting indicate that lockstep could be safe, although compulsory retirement ages below 65 may not be. Nevertheless, can this be viewed as an opportunity for partnerships to use this legislation as a reason to revisit partnership agreements?

Many agreements will have been in place for a long period of time and they may not cater for situations arising in today’s modern partnerships.

This article looks at some of the issues now faced by partnerships in light of the Age Discrimination Regulations and how these will impact on the evolving professional-services market. To illustrate the practical problems encountered, let’s look at a variety of conversations taking place with a managing partner:

“I have been qualified for five years and I think I have demonstrated the skills needed from a partner in terms of technical expertise and building client relationships so I am keen to be promoted to partner this year. I know the partnership agreement states that I must have been qualified for seven years, but I believe I am ready now. If I have to wait seven years then I might need to reconsider my options.”

Some partnership agreements use length of service as a basis for promotion and reward. Under the regulations, this could be considered discriminatory against younger candidates, as there is a deemed benefit for those with longer work experience and hence older. The problem is likely to be even more overt if the partnership has a minimum age requirement for partners, rather than years of work experience.

There is, however, a more important practical issue here as the firm could lose potential high flyers to a competitor with a more flexible promotion policy.

Sourcing talented individuals with partner aspirations and appropriate skills is difficult, particularly in small and mid-tier firms. These individuals will naturally be ambitious in both career progression and remuneration expectations, and gaining the title of ‘partner’ should not be underestimated as a driver for them.

To lose good staff in which a firm has invested time and expense to train is a major setback. Recognition is usually the driving force here, and this is generally determined, at least initially, by level of remuneration and status. If potential partners do not progress at the speed they feel they should, and are attracted by earlier promotion and a greater remuneration package elsewhere, then these factors may well outweigh loyalty. The partnership agreement needs to offer flexibility to promote on merit rather than on age or length of service.

"I have been reviewing my pension situation and, due to market conditions over recent years, I cannot afford to retire at 60. Therefore I would like to continue to age 63.”

Historically, partners in professional-service firms have wanted to retire as soon as possible. However, people are living much longer into retirement and, therefore, pension provisions are causing many to rethink.

Under the regulations, it may be discriminatory to force a partner to retire at 60 if he or she does not wish to do so. Practically, there are positive and negative issues that arise from this. A number of practices have had cash-flow issues in returning capital to retiring partners, particularly where several partners retire in close succession. A partner wishing to stay on for longer could, therefore, be helpful in spreading the repayment timescale.

On the other hand, how is this likely to be viewed by the younger partners?

Would this hinder their progression – do partners need to retire to make way for new partners? Will the senior partner still expect to be paid at his or her current level of remuneration and, if so, how would this be viewed by the younger partners who may have had expectations of a share in a larger profit pool?

“I have been working at your competitor firm, ABC & Co for three years as head of department and have doubled the fee income during that time. The level at which I would need to enter your lockstep system would mean that I would have to take a reduction in income. Would it not be fairer to take account of my contribution to the firm?”

Lockstep may actually have had a reprieve under the regulations currently before parliament. Firms wedded to this system, therefore, may be breathing a huge sigh of relief.

Firms in the mid-tier, however, are finding the number of internal candidates coming through to partnership is insufficient to cover succession issues, let alone growth.

It used to be the case that partners stayed with a practice until retirement, particularly among the small and mid-tier firms. Now there is considerably more movement in the lateral-hire market than would have been the situation ten years ago.

Partnership agreements written prior to this are unlikely to take account of the need to recruit partners from other practices and, therefore, firms cannot always accommodate lateral hires within their lockstep system. This is particularly relevant where recruitment is taking place for growth, perhaps in a new area of specialism, where potential candidates will be high achievers capable of developing the practice. If such a partner is brought in to the lockstep system above the ‘normal’ level, that is, not rigidly applying criteria such as length of experience, then this may cause an outcry from existing partners.

“The senior partner is just biding his time now. I seem to be doing all of his work, but not being rewarded for this. He is due to retire at age 60 according to our partnership agreement and this is only one year away. However, he has indicated that he might want to stay on for several more years and if he does then it does not seem fair if he continues to draw such a large profit share.”

Fixing a retirement date before age 65 is usually done on the grounds of effective succession planning. So how will your practice deal with those partners wishing to work for longer?

Automatically reducing income in the latter years of partnership is likely to be seen as discriminatory to older partners. This will only be lawful under the Age Discrimination Regulations if the firm can show objective justification, and this may be difficult.

Partnership agreements may set out earning levels up to a fixed retirement age, normally 60, but are unlikely to cover the situation where a partner works beyond this stage. A senior partner may not wish to continue with a heavy client workload; however, his/her skills may be invaluable in terms of networking and attracting new business.

It is a fact, though, that the work performance of some partners declines in later years and if they remain on a high profit share this will disillusion the younger partners who feel they are making a greater current contribution.

The Age Discrimination Regulations could make it very difficult to force a partner who wants to work beyond the age limit specified in the partnership agreement, to leave. Therefore, the only practical way of removing such a partner would be on the grounds they are falling short of performance standards. Formal performance standards may not be in place in a lockstep system, so any discussions around this area could be difficult and open to challenge. In any event, this might be viewed as an undignified way to treat a long-serving senior partner.

There is no easy answer to this point, but it can be managed to an extent by an effective appraisal system and a reward structure that is based on clearly predetermined performance requirements.

“The market is moving quickly and we need to change at the same pace if we are not going to get left behind. The problem is that the senior partners hold the balance of power and are reluctant to change. They will retire soon and it will be the younger partners who are most affected.”

Often under a lockstep system, voting rights will increase from level to level. This could leave the senior partners able to outvote the younger partners. Change can always be a challenge, and senior partners approaching retirement may be reluctant to alter the way they have previously operated, or may have a different attitude to risk. Examples could include potential merger opportunities; relocation of a firm; and setting up or discontinuing departments. This can lead to resentment from other partners if they feel opportunities are being missed. This problem can be avoided, however, as voting rights do not need to equate to levels of lockstep.

“I really feel that I am contributing more than some of the partners with higher earnings than myself. Not everyone is pulling their weight, yet our earnings system does not take account of this.”

This is not a problem connected with Age Discrimination Regulations, but a practical one of management. It is essential to ensure that all partners are making a full contribution to the practice, albeit in different ways. Issues such as this are sometimes down to perceptions and partners not knowing what other partners are contributing – communication is key.

“We have discussed moving away from lockstep towards performance-related remuneration but I am uncomfortable with this. I think it will totally change our culture.”

The arguments for lockstep are that it is simple; it can create a team culture rather than every man (or woman) for themselves; and it can avoid the need for appraisals at partner level. This system can work well if all partners are pulling their weight.

In today’s market where growth and succession planning are of real importance, however, it is necessary to be able to attract and retain high-calibre, ambitious partners.

These individuals are often likely to be motivated by a reward system that recognises their contribution. On the other hand, many practices do not like pure, performance-related remuneration as it can be aggressive in nature and complex to manage.

Performance-related remuneration can create a culture where partners keep work for themselves to get billing credit, rather than pass it on to another partner who is more suited, either in terms of managing the client relationship or technical expertise. However, with strong management and the setting of relevant performance measures, this system can help to generate real growth in a practice.

There are various systems of profit sharing that can achieve the aims of both lockstep and performance-related remuneration. It does not have to be one extreme or the other. It is important, though, to ensure the right scheme is put in place to suit the culture and nature of your specific firm, and to help the practice achieve its strategic aims.

“The idea of a performance-related remuneration system is okay in principle, but this will necessitate us having appraisals at partner level. We have never done this and I feel uncomfortable with the process.”

A clearly structured and transparent appraisal system can be invaluable to any practice if used correctly. This can then help to justify ‘early’ promotions to partnership and to assist with performance standards required by all partners regardless of age.

Hence it will become a very important management tool to help avoid potential problems arising under the Age Discrimination Regulations.

Careful thought needs to be given to the performance standards set. There should be general standards applicable to all partners based on skills and behaviour required for their role. The system should include setting specific objectives for each partner that will differ according to skills and the type of work undertaken. These might include, for example, fee income generated, management responsibilities, business and staff development. Clearly defined objectives should be capable of being measured, and regularly revisited, to ensure continued relevance.

Appraisals should be regular and any shortfall in performance standards discussed. If the practice has adopted a remuneration system based on performance, then these standards can form the basis of the profit-share allocation. If the practice has a lockstep system, then the appraisal process is still of equal importance to be able to justify that decisions regarding new and retiring partners are made on the basis of performance and not age or any other discriminatory criteria.

“We are considering transferring to an LLP structure in two years’ time. Why should we amend our partnership agreement now to help with the new Age Discrimination Regulations when we will have to repeat this exercise when we transfer to an LLP?”

The move towards LLP status among mid-tier firms is gaining momentum, and for many firms that have not already converted to LLP, this is on the agenda over the next two years. A move to LLP will necessitate drawing up a members’ agreement, so revisions to existing policies are likely to be required. If this route is part of your firm’s strategy then reviewing the current partnership agreement now, to take account of both age-discrimination laws and the proposed content of an LLP members’ agreement, will make transition simpler when the time comes. In the meantime, it will also help to avoid issues arising under the Age Discrimination Regulations.

A final thought…

Dealing with legislative issues is often more straightforward than dealing with personal issues raised by partners and, although the latter cannot always be predicted, they should never be underestimated.

Ensuring that the legislative issues arising from the Age Discrimination Regulations are properly taken account of in the partnership agreement can help to justify that management decisions covering recruitment, promotion, reward and exit, are not based on age but are properly measured on individual merit.

This is particularly important as damages awarded for age discrimination will be unlimited. It is better to be prepared.

Practical tips

Ensure your partnership agreement does not contain a reference to a minimum age requirement, but refers instead to having sufficient experience to be capable of performing the role;
Ensure your promotion policies are sufficiently flexible to prevent you from losing quality candidates. Then ensure these policies are properly communicated to potential candidates so as to dispel any perceptions that the route to partnership may take longer than at rival firms;
It may be difficult to prevent a partner from working beyond the desired retirement date. Have discussions with your partners now to assess the appetite for working longer and consider reward structures to ensure that these are linked to roles performed and effectiveness. Don’t be tied to the concept that earnings must be geared to length of service;
Ensure that clear messages are given to junior partners and potential partners that partners working beyond retirement age will not hinder their progression;
Consider whether lockstep is still appropriate and take advice on other ways of rewarding partners, so as to be able to accommodate strong lateral-hire candidates, while being fair to existing partners. Lateral hires may be one of the most effective ways of achieving growth and developing specialist services;
Ensure there is a good appraisal system in place, which sets out clear objectives and expectations for each individual partner to ensure their contribution to the firm is maximised;
Partners approaching retirement or working beyond the ‘normal’ date may have very different performance requirements to a mid-career partner. The practice needs to assess how to use an individual partner’s skills so as to ensure contribution equals remuneration;
Review voting structures. Distinguish between the important issues and the routine ones, and consider having different voting structures for each;
Consider setting up a management team and/or an executive committee with a small number of partners representative of the practice profile. These teams need to be empowered to take certain decisions on behalf of the partnership and to make recommendations to the partners on significant matters requiring wider approval;
Whether using a lockstep system or performance-related system, good appraisal procedures with clear objectives for each partner can give a basis for monitoring performance and dealing with issues as they arise;
If considering a system of performance-related pay, consider who will decide on the profit level applicable to an individual partner. This is best done by a management committee or an equity committee;
Set performance standards and objectives that are not just fee related, but balanced across the skills set required of a partner;
It is important to have the buy-in of the individual partners. General performance standards can be set centrally, but individual objectives should be agreed in conjunction with the individual;
For internal promotion to partnership, ensure that there are clear guidelines as to the performance standards required for promotion and a clear procedure as to how an individual will be evaluated;
Consider who is best to carry out the appraisals and ensure appraisal meetings are carried out consistently across the practice. It might be appropriate to use an external appraiser with appropriate input from line management;
Consider the firm’s strategy for growth and ensure that any revisions to the partnership agreement now take account of this strategy, in addition to legislative requirements

Rowan Williams is a partner at BDO Stoy Hayward. She can be contacted at rowan.williams@bdo.co.uk