Law firms and associate careers: tournament theory versus the production-imperative model.

• Author: Kordana, Kevin A.

Pray look better, Sir, quoth Sancho; those things yonder are no

Giants, but Wind-mills ....(1)

The career of an associate in a large law firm has been portrayed in stark Darwinian terms: Only the fittest survive the "tournament" that is established by the firm's partners. Such is the tale told by Marc Galanter and Thomas Palay in Tournament of Lawyers: The Transformation of the Big Law Firm.(2) This "tournament theory" explanation for the structure of large law firms has been widely adopted,(3) and has received surprisingly little criticism.(4)

This Note argues that an associate's employment contract does not enact Mr. Herbert Spencer's Social Statics.(5) It demonstrates that tournament theory is inapplicable to large law firms(6) and proposes an alternative model of law firm structure. It argues that, because serious monitoring difficulties do not exist, law firms need not adopt a tournament for their associates. Moreover, it shows that a tournament would not motivate all associates, nor would the tournament be sustainable in the face of changing economic conditions outside the firm. It then presents empirical evidence suggesting that firms are not in fact employing tournaments. This Note proposes that law firm structure is determined not by the operation of tournament theory, but by a production-imperative model. This model suggests that the type of work performed in law firms dictates their structure, that law firms hire associates to keep their costs down and profits up, and that associates come to large firms mainly to improve their lawyering skills and increase their general human capital.

Part I of this Note presents the tournament theory explanation of law firm structure. Part II examines the economics literature about tournaments and concludes that tournament theory is not applicable to law firms. It criticizes tournament theory for predicting too much about law firms--namely, that tournament theory also requires partners to progress through a series of tournaments throughout their tenure at a firm. The Part demonstrates that tournament theory fails to consider that many associates may not be participating in the tournament. It also shows that a tournament would be unstable because of fluctuations in the market outside the firm, and presents evidence that, contrary to Galanter and Palay's assertion, a fixed percentage of a firm's entering classes are not promoted to partner. Having rejected the dominant explanation for law firm structure, the Note goes on to develop an alternative model that more accurately reflects the reality of law firm life. Part III proposes the production-imperative model, in which law firm production requirements, the desire of young attorneys to develop their human capital, and market demand interact to create the associate career patterns characteristic of large law firms.

1. GALANTER AND PALAY'S TOURNAMENT MODEL OF LAW FIRM STRUCTURE

   This Part discusses the origin of tournament theory in economics and outlines Galanter and Palay's incorporation of tournament theory in their description of law firm structure. Tournament theory arose when economists attempted to explain a puzzling feature of the labor market. Although ordinary market theory states that workers will be paid the marginal product of their labor,(7) an executive typically receives a dramatic pay increase if he or she is promoted from among several vice presidents to become the chief executive. It seems implausible that only several days after the promotion the new chief executive is contributing dramatically more to the company than he or she had as a vice president so as to warrant the pay increase. Tournament theory attempts to explain why earnings might be tied to job category rather than to productivity. Since it is difficult to determine the productivity of "supervisory or managerial" workers in a bureaucracy,(8) firms turn to a tournament to motivate their workers. The tournament model focuses on the incentives created for all workers by a prize awarded to the "tournament" winner.(9)

   Galanter and Palay offer the most developed application of tournament theory to law firms. Their story of law firm structure starts by emphasizing the importance of human capital. In economics, the classical factors of production are land, labor, and capital. "Capital" refers to goods that are employed to increase the productivity of land and labor (e.g., machinery).(10) By analogy, the term "human capital" is now used to refer to "the stock of skills and productive knowledge embodied in people."(11) The more human capital someone has, the more productive, ceteris paribus, he or she will be. Human capital is classified as either general or specific. Specific human capital raises a worker's productivity, but only with respect to a single firm. General human capital raises a worker's productivity for many jobs or firms.(12)

   In Galanter and Palay's view, an attorney has four main types of human capital: (1) general intelligence and education; (2) legal skills gained through education and experience; (3) professional reputation; and (4) client relationships.(13) The level of human capital varies from lawyer to lawyer. Some lawyers have a surplus of human capital; others do not have enough. Those lacking in human capital can be seen as having "surplus labor"--they cannot on their own generate sufficient business to keep busy. An attorney with excess human capital, on the other hand, will have too many potential clients to handle by him or herself, because that attorney's labor is limited to what one person can do. When an attorney with excess human capital cannot accomplish all that he or she could without time constraints, some of the attorney's human capital languishes unused. Such a lawyer would benefit if it were possible to rent this surplus human capital to attorneys with surplus labor.(14)

   While, ordinarily, simple market transactions (i.e., contracts) are sufficient to govern the lending of most assets from one party to another, this is not true for human capital. The unique nature of the asset and of the investments necessary to transfer it means that it is hard to substitute another "surplus labor" attorney once a transaction is undertaken;(15) that is, it would be costly to familiarize a new attorney with a half-completed project. Additionally, it would be difficult or impossible to specify adequately all of the terms and conditions that might be necessary as circumstances change during a project-length contract. This would leave an attorney hired under such a contract relatively unsupervised, which would put the reputation and client relationships of the lawyer with excess human capital at risk.(16)

   Given these problems with project-length labor contracts, attorneys with excess human capital will instead enter into long-term employment relationships with attorneys lacking adequate human capital. This is the genesis of the law firm. Although governing the employer/employee (or, as it is commonly termed in the legal profession, partner/associate) relationship is less costly than engaging in a series of project-length contracts, Galanter and Palay suggest that monitoring the actions of associates will still be "difficult and costly."(17) Among the problems that arise in the supervision of the partner/associate relationship is that an associate could leave before the firm receives adequate return on its investment in associate training and client development. The associate might even be able to lure away clients upon departure. An associate also might "shirk"; that is, not work as hard as is necessary or expected. Although deferred payment (e.g., bonuses after set time periods) might help solve the problems of premature leaving and client stealing, it would not alleviate shirking. While payment based on worker productivity ordinarily provides adequate incentive to work hard, Galanter and Palay assert that it is hard to evaluate, or monitor, how hard attorneys are working; therefore, payment based on productivity cannot alleviate associate shirking in law firms. Instead, according to Galanter and Palay, firms adopt a "`promotion-to-partner tournament.'"(18)

   The "tournament" provides a deferred bonus that gives associates an incentive to stay with the firm and to work hard. The tournament among a firm's associates operates, according to Galanter and Palay, in this manner: A limited but fixed percentage of associates will, after a set time period, be promoted to partner and receive a "`superbonus.'"(19) This superbonus consists of the security, prestige, and large income(20) that partnership confers. The firm will pick the winners of the tournament based on their human-capital development (since partners need to have excess human capital to share with associates who have surplus labor) and on the quality and quantity of their work product. The firm's adherence to its promise to promote is easily monitored by associates.(21) Thus, the firm solves the problem created by its inability to monitor associate output effectively, and by its need to recover its investment in associate training, by creating a promotion-to-partner tournament. This tournament motivates associates to work hard and to remain with the firm.

2. THE FAILURE OF TOURNAMENT THEORY AS AN EXPLANATORY MODEL OF LAW FIRM STRUCTURE

   While tournament theory offers an intriguing explanation for associate career patterns in large law firms, Galanter and Palay invoke the theory without fully explaining it and demonstrating its applicability to law firms. This Part examines the economic model of tournament theory and ascertains whether it applies to law firms. It finds that while promotion from associate to partner bears a superficial similarity to the promotion among executives that was the impetus for the development of tournament theory, tournament theory cannot credibly be extended to explain law firm structure. This Part then explains that, contrary to the...