You are a management consultant for a 30-year old partner in a large law firm. I

Question

You are a management consultant for a 30-year old partner in a large law firm. In a meeting, your client says: “According to an article in the New York Times, 57 percent of large law firms have a mandatory retirement age for partners in the firm. Before they retire, partners are paid directly for the work that they do, and, as an owner, they are entitled to a share of the profits of the firm. Once they retire, partners do not receive either form of compensation. In light of this, I think we should eliminate mandatory retirement in order to gain a ‘competitive advantage’ in attracting high-quality lawyers to work for our firm. Of course, you are the expert.” What should you recommend?

1. Do not implement this plan; it will result in incentive compatibility problems. 2. Implement this plan; it will attract high-quality workers, especially those nearing retirement. 3. Do not implement this plan; it will generate high transaction costs. 4. Implement this plan; it will greatly lower transaction costs.

Explanation / Answer

Ans. Do not implement this plan; it will result in incentive compatibility problems.

If partners in the law firm are paid an equal share of the overall profits of the firm, regardless of howmuch they contribute, lawyers nearing retirement will have an incentive to stay with the firm whiledoing as little work as possible. In this way, he or she can enjoy “semi-retirement,” but will continueto earn a share of the profits from other’s hard work. For this reason, most law firms have mandatoryretirement to mitigate incentive compatibility problems. Eliminating mandatory retirement is probablynot a good idea for your 30-year old client.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.