The W$J's Law Blog reports that most big law firms plan to hire more associates in the coming year:
“It’s all about firms trying to build up leverage,” says DiPietro, referring to the ratio of associates to partners. ...
Instead of hiring fleets of new associates, can’t law firms just ask their existing worker-bees to put in a few more hours every month? DiPietro says that associates are, on average, billing more hours then they were several years ago, but that they’re not at the the levels seen from 1998-2000. “I don’t know why that is,” he says, “if it’s a ‘Gen Y’ thing or what. But the ranks of associates are swelling because the firms aren’t getting them to work” as hard as they’d like.
Talk to us associates — what do you think is better for firms, and for yourselves: that firms hire more associates (thus making partnership more competitive), or task their current fleet with billing more hours (and thus making everyday life a bit more brutal)?
It's not obvious (at least to me) which option makes more sense for either firms or associates.
Like many other service firms, law firms use promotion tournaments as a mechanism for reducing agency costs through comparative performance evaluation. In a promotion tournament, the principal ranks its agents by their performance relative to one another. The best performing agents are promoted to positions with higher pay and/or status. In law firms, associates thus are ranked and the best performers are promoted to partner at the end of an evaluation period.
For law firms, the promotion-to-partner tournament solves two agency cost problems at a single stroke. On the one hand, the firm makes investments in its associates' human capital -- i.e., skills and client relationships -- during their apprenticeship. The firm will want to discourage associates from leaving the firm before it has fully amortized those investments. On the other hand, the firm must also deter shirking by associates. The firm gives associates incentive both to remain for the optimal period and to maximize their productivity during that period by holding what someone (I've lost the citation) called "a tournament in which all the associates in a particular entering class compete and the firm awards the prize of partnership to the top X percent of the contestants."
The prize of promotion to a more secure and higher status position, plus the accompanying increase in compensation, gives lawyers an incentive to remain at the firm. Conversely, the threat of losing the tournament deters shirking.
Hiring more associates means that a given junior lawyer's chance of winning the tournament decline. Unless the effect of adding additional leverage is to increase the value of the prize by an off-setting amount, hiring more associates therefore means the present value of the prize decreases for each associate and each associate therefore has less incentive to refrain from shirking and less incentive to remain at the firm.
Conversely, demanding more from the worker bees increases the current costs incurred by the associates competing in the tournament. Again, the net present value of the prize therefore decreases. Again, the prize has less of an incentive effect with respect to both shirking and retention.