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Increasing Attrition in Business Firms document sample
Increasing Attrition in Business Firms document sample
Vol. 1, Issue 1 48 ASSOCIATE ATTRITION AND THE TRAGEDY OF THE COMMONS Joshua Johnson* ABSTRACT Empirical studies and anecdotal evidence suggest that associate attrition is a significant and increasing problem for large law firms. My Article examines how incentive structures at law firms affect associate retention rates. My central thesis is that partners’ use of associate labor resembles a classic “tragedy of the commons” in which associates are overworked and undervalued. The overexploitation of associate labor dampens morale among associates and leads to inefficiently high levels of associate attrition. Law firms can resolve this problem by forcing partners to “internalize” the attrition costs that their exploitative activities impose on the firm. INTRODUCTION ...................................................................................50 I. A Problem: Associate Attrition.................................................... 57 A. Recent Data on Associate Attrition................................... 57 B. The Costs of Associate Attrition........................................63 i. Is Associate Attrition Really a “Problem”? ...........63 ii. Calculating the Costs of Attrition ..........................68 iii. How High Is Too High When It Comes to Attrition Rates? ..................................................69 C. Why Are So Many Associates Leaving?............................72 II. A Cause: The Tragedy of the Commons.......................................76 A. What is the “Tragedy of the Commons”? .........................76 B. Law Firms and the Tragedy of the Commons..................78 i. The Pure Expense-Sharing Firm.......................... 80 ii. Refining the Model.................................................83 iii. Explaining the Sick Cycle.......................................84 ________________________ * Joshua Johnson is a second-year student at Yale Law School. 49 Spring 2008 C. Why Have Firms Not Taken More Aggressive Action To Solve the Tragedy?............................................85 D. Evaluating My Analysis and Understanding Its Limitations ........................................................................ 88 III. Potential Solutions ........................................................................89 A. Moving to a Lockstep or “Income Sharing” Model ..................................................................................89 B. Making Associate Retention a Factor in Partner Compensation Decisions .................................... 90 CONCLUSION .......................................................................................94 Vol. 1, Issue 1 50 A young associate was invited to a party at the home of an august senior partner at his firm. The associate wandered awestruck through the house, especially amazed at the original artworks by Picasso, Matisse, and others adorning the walls. As the associate stood gazing at one Picasso, the senior partner approached, and put his arm around the associate’s shoulder. “Yes,” he said, “if you work long and hard, day in and day out, six, seven days a week, ten, 12 hours a day, I could buy another one!”1 INTRODUCTION In every joke lies a seed of truth. The humorous tale recounted by Marc Galanter in the pages of American Lawyer trades on feelings of exploitation experienced by young associates working in “large” law firms.2 As Galanter explains, the partner in the joke “seems headed in the direction of inviting the young associate to emulate his own climb to eminence,” but then the partner reveals that he views the young associate “only as a source of profit.” 3 The partner “unhesitatingly quashes the dreams” of the young associate and conceptualizes his relationship with the associate in “entirely instrumental terms.”4 According to Galanter, the theme of associate exploitation “has found expression in lawyer jokes only in the last ten years or so, as 1 Marc Galanter, Not the Aristocrats, AM. LAW., Nov. 2005, at 71. 2 There is no consensus on what constitutes a “large” law firm. In a study of associate attrition, the NALP Foundation divides law firms into three groups: those with 250 or fewer attorneys, those with 251 to 500 attorneys, and those with 501 or more attorneys. See PAULA A. PATTON, NALP FOUNDATION FOR LAW CAREER RESEARCH AND EDUCATION, KEEPING THE KEEPERS II: MOBILITY & MANAGEMENT OF ASSOCIATES 24 (2003) [hereinafter NALP, KEEPING THE KEEPERS II]. Generally, when I refer to “large” law firms, I have in mind firms with more than 500 attorneys. As Patrick J. Schiltz explains, however, many “smaller” law firms model themselves after the leading “large” law firms. Therefore, there are many law firms that “act” like large law firms in terms of their organizational and business strategies even though they have far fewer than 500 lawyers. See Patrick J. Schiltz, On Being a Happy, Healthy, and Ethical Member of an Unhappy, Unhealthy, and Unethical Profession, 52 VAND. L. REV. 871, 924 (1999). 3 Galanter, supra note 1, at 71. 4 Id. 51 Spring 2008 associate retention and satisfaction have become issues at large firms.”5 Job satisfaction is currently a hot topic in the legal profession. Although job satisfaction is notoriously difficult to measure, the popular consensus suggests that attorneys are an unhappy lot, and the most miserable lawyers are those working in large law firms.6 Even if the problem of attorney dissatisfaction has been exaggerated,7 it is indisputable that young law-firm associates are an extremely mobile group. In its annual survey of midlevel associates, American Lawyer found that only 44.9% of respondents predicted that they would still be at their current firms in five years, and only 11.7% expected to become equity partners at their current firms.8 After the JD, a longitudinal study tracking the careers of more than 5000 attorneys during their first ten years after law school,9 found even greater levels of wanderlust among young associates. Forty-five percent of respondents in offices with 101 to 250 lawyers reported that they intended to change jobs within two years, and among respondents in offices of 251 or more lawyers, 55% expected to be at a different job in two years.10 These intentions to move are largely borne out in practice. In a detailed study of associate attrition, the NALP Foundation found that 53.4% of entry-level associates leave their law firms within fifty-five months of their start dates.11 Recent empirical evidence suggests that associate attrition rates are on the rise, 12 5 Id. 6 See Schiltz, supra note 2, at 881-88 (discussing multiple studies showing high levels of dissatisfaction among attorneys, especially those working in large law firms, but also describing a study of Chicago lawyers demonstrating that 84% of respondents were either “very satisfied” or “satisfied” with their careers). 7 See Aric Press, The New Reality, AM. LAW., Aug. 2007, at 91 (concluding based on the results of the magazine’s annual midlevel associate satisfaction survey that “[a]ssociates aren’t miserable, except perhaps in certain high-pressured New York precincts”). 8 See id. 9 RONIT DINOVITZEV, ET AL., NALP FOUNDATIONS FOR LAW CAREER RESEARCH AND EDUCATION & AMERICAN BAR FOUNDATION, AFTER THE JD: FIRST RESULTS OF A NATIONAL STUDY OF LEGAL CAREERS 13 (2004) [hereinafter AFTER THE JD]. 10 Id. at 54. 11 NALP, KEEPING THE KEEPERS II, supra note 2, at 24. 12 CYNTHIA L. SPANHEL, NALP FOUNDATION FOR LAW CAREER RESEARCH AND EDUCATION, TOWARD EFFECTIVE MANAGEMENT OF ASSOCIATE MOBILITY: A STATUS REPORT ON ATTRITION 8 (2005) [hereinafter NALP, TOWARD Vol. 1, Issue 1 52 and with the estimated costs of replacing a departing associate ranging from $250,000 to $500,000, law firms appear increasingly worried about associate turnover.13 Periodicals focusing on issues of law-firm management are replete with articles bemoaning the problem of associate attrition and suggesting ways in which firms can improve their retention of young associates.14 The elite New York law firm Sullivan & Cromwell even organized a crash course in etiquette for its partners after the firm’s internal data showed that the firm lost 31% of its associates in 2004 and 30% of its associates in 2005. The confidential slide presentation encouraged partners to indulge in such common courtesies as saying “thank you” and “good work” to associates and promptly returning associates’ phone calls.15 The rising popularity of commercial seminars promising to help firm managers boost retention rates further demonstrates the extent to which firms are concerned that associate attrition may be negatively affecting their bottom-line.16 Law firms’ primary response to associate attrition, however, has been to recruit aggressively, dedicating staggering amounts of time, money, and effort to woo fresh blood to replace departing associates. Law firms typically begin recruiting new associates during their second year of law school. If a student has EFFECTIVE MANAGEMENT] (concluding based on attrition data that associate turnover is a “growing” problem for legal employers). 13 JOAN WILLIAMS & CYNTHIA THOMAS CALVERT, PROJECT FOR ATTORNEY RETENTION, BALANCED HOURS: EFFECTIVE PART-TIME POLICIES FOR WASHINGTON LAW FIRMS (2d ed. 2001), available at http://www.pardc.org/Publications/BalancedHours2nd.pdf. 14 See Associate Management, PARTNER’S REP. FOR L. FIRM OWNERS, May 2007, at 4; Associate Retention, PARTNER’S REP. FOR L. FIRM OWNERS, July 2007, at 6; Joan Newman, Appreciate Your Associates: Make Your Firm a Workplace of Choice, LEGAL MGMT., Mar./Apr. 2007, at 47; Steven T. Taylor, To Curb Associate Attrition Rates, Firms Must Stay Tech Savvy, OF COUNS., Aug. 2007, at 1; Charles A. Volkert, Got Talent?: Learn How To Keep Good Employees, LEGAL MGMT., Oct./Nov. 2006, at 22. 15 Peter Lattman, Does “Thank You” Help Keep Associates?, WALL ST. J., Jan. 24, 2007, at B7. 16 Project for Attorney Retention, Retention and Reduced Hours, http://www.pardc.org/Publications/retention_and_hours.shtml (last visited Mar. 30, 2008). For example, the American Conference Institute regularly hosts pricey seminars that pledge to help law firms “successfully tackle a multitude of hurdles,” such as “controlling costs” and “[r]ecruiting and retaining top talent.” American Conference Institute, Legal and Business Conferences and Publications, Law Firm Management, http://www.americanconference.com/Law_Firm_Management.htm (last visited Mar. 30, 2008). 53 Spring 2008 the requisite credentials and performs well in his or her interviews, a law firm will offer the student a position as a “summer associate” with the expectation that the firm will likely extend the student a full-time offer at the end of the summer.17 Firms may “spend as much as $250,000 to recruit a single summer associate,” and despite these costs, a survey by the National Association of Law Placement (NALP) shows that less than 30% of students who are offered a position by a firm with more than 250 lawyers accept the offer.18 Increasingly, law firms are supplementing their traditional recruitment of law-school students by engaging in the once taboo practice of hiring so-called “lateral attorneys” who have graduated from law school and worked in other legal jobs.19 Data from the NALP Foundation show that laterals today comprise more than 40% of all associate hires.20 The competitive market for top legal talent imposes stiff costs on law firms. Firms currently “spend up to 1.5% of their annual revenues on associate recruitment and retention,” and these costs show no signs of abating.21 In fact, as firms grow and the size of the graduating classes of elite law schools stays relatively constant, firms are likely to face increasing scarcity in the legal labor market.22 Firms are already engaging in costly bidding wars in an effort to attract new hires.23 In the latest round of increases, the nation’s largest, most prestigious law firms raised the salaries of first-year associates from $145,000 to $160,000.24 To pay for these raises, firms are increasing and strictly enforcing 17 See generally Tom Ginsburg & Jeffrey A. Wolf, The Market for Elite Law Firm Associates, 31 FLA. ST. U. L. REV. 909, 915-30 (2004) (describing the typical law-firm recruitment process). 18 Elizabeth Goldberg, Open Season, AM. LAW., Aug. 2007, at 93, 93. 19 NALP, TOWARD EFFECTIVE MANAGEMENT, supra note 12, at 26. 20 Id. 21 Newman, supra note 14, at 47. 22 Junior Lawyers, PARTNER’S REP. FOR L. FIRM OWNERS, Aug. 2007, at 5 (noting that the 200 highest-grossing firms in the United States “now hire about 10,000 new associates a year, or about 50% of the graduates from the top 100 of the nation’s 200 law schools”). 23 Ross Todd, The Going Rate: Firms Around the Country are now Paying Their First-Years Anywhere from $115,000 to $145,000, AM. LAW., Mar. 2006, at 28 (“In 1999 the Menlo Park, California-based firm Gunderson Dettmer Stough Villeneuve Franklin & Hachigian raised first-year associate pay by more than $20,000, to $125,000. After that, a bidding war broke out nationwide, and salaries once unheard-of became the national norm.”). 24 Stephanie Francis Ward, Who Will Pay for Associate Raises: Partners or Clients?, ABA J. E-REP., Feb. 2, 2007, at 1. Vol. 1, Issue 1 54 billable hours expectations.25 Firms may be paying associates more, but they are also expecting them to work harder in exchange for their increased compensation. Studies suggest that increases in billable hours requirements could yield higher associate attrition rates. The MIT Workplace Center, for example, recently sent surveys to all attorneys who graduated law school since 1987 and were at one of the hundred largest firms in Massachusetts in 2001. The 971 respondents provided detailed information about their career decisions between 2001 and 2005 and their reasons for them.26 More than half of the respondents who left law-firm practice between 2001 and 2005 reported that they did so because of “work load pressures,” and almost 60% cited “long work hours” as one of their reasons for leaving firm practice.27 Among respondents who moved to a different law firm rather than leaving firm practice entirely, workload pressures and long work hours were not as salient a concern. Nevertheless, more than 20% of men and more than 30% of women who switched law firms cited “work load pressures” as a reason for their move.28 Furthermore, a higher percentage of respondents said that they switched law firms because of “long work hours” than said that they moved because of the better wages and benefits offered at their next job.29 These survey results suggest that demanding billable hours expectations exacerbate the problem of attorney attrition while increasing compensation does not necessarily persuade attorneys to stay with their firms. Law firms seem to be caught in a sick cycle. Faced with undesirably high associate attrition rates, law firms recruit aggressively to replace their departing employees. To attract the top talent in an increasingly competitive labor market, firms feel compelled to raise associate salaries to previously unthinkable 25 Todd, supra note 23, at 28. 26 MONA HARRINGTON & HELEN HSI, WOMEN LAWYERS AND OBSTACLES TO LEADERSHIP: A REPORT OF MIT WORKPLACE CENTER SURVEYS ON COMPARATIVE CAREER DECISIONS AND ATTRITION RATES OF WOMEN AND MEN IN MASSACHUSETTS LAW FIRMS 6 (2007), available at http://web.mit.edu/workplacecenter/docs/law-report_4-07.pdf 27 Id. at 12-13. The study considered the reasons for departure of all attorneys leaving firm practice, whether associates, income partners, or equity partners. 28 Id. at 18-19. Again, the study considered all of the respondents’ reasons for switching law firms and did not focus specifically on associates’ departure decisions. 29 Id. 55 Spring 2008 levels. To pay for these raises, firms demand that their associates work harder and longer. But as billable hours expectations increase, associates are more likely to leave their law firms, and firms are forced to recruit even more aggressively because of their failure to retain the associates they hire. Attrition thus begets pay raises, which in turn yield more attrition as billable hours requirements rise. At first glance, this self-reinforcing cycle seems wholly irrational. Why, one feels compelled to ask, are law firms responding to undesirably high associate attrition rates by taking steps that only seem to compound the problem? Instead of dedicating so much time, money, and effort to recruiting and compensating new hires, why do firms not focus more attention on retaining the attorneys they currently employ? The firms’ actions bring to mind the old story of the man who repeatedly jumped into the river to save people from drowning, never once thinking that his time might more effectively be used by doing something about the person who was throwing the victims into the water. Why do firms not attack the root causes of associate attrition instead of focusing on short-term solutions that merely mitigate the problem’s immediate symptoms? This Article attempts to answer these questions by suggesting that law firms are trapped in a dynamic that economists ordinarily refer to as the “tragedy of the commons.”30 I argue that associates constitute a “commons” subject to exploitation by a firm’s partners. Since law firm partners are usually compensated based on the business and revenue they generate for the firm, partners have an incentive to cultivate as much new legal work as possible in order to maximize their annual income. Partners then rely on associate labor to “staff” the projects they bring to the firm. Because partners enjoy a disproportionate share of the benefits of exploiting associate labor while they share the costs of this exploitation with all the firm’s members, partners have an incentive to (1) demand that the firm hire an inefficiently large number of associates to staff their projects; and (2) overwork those associates that the firm does hire. Furthermore, partners have little incentive to engage in personally costly activities, such as mentoring and training, that 30 Garrett Hardin is generally credited with first identifying and fully describing this phenomenon. See Garrett Hardin, The Tragedy of the Commons, 162 SCIENCE 1243 (1968). For a more detailed description of the “tragedy of the commons,” see infra Section II.A. Vol. 1, Issue 1 56 could bolster associate retention because they bear the full cost of these endeavors while sharing the benefits with the other members of the firm. This dynamic creates a “tragedy of the commons” in which associates tend to be overworked and undervalued, ultimately resulting in an inefficiently high rate of associate attrition. This analysis of the problem of associate attrition is unique. To my knowledge, no one else has examined the issue using the analytical framework of the “tragedy of the commons.” In fact, most commentators have explained the phenomenon of associate attrition in terms of a generational divide, positing that members of Generation Y simply are not willing to sacrifice their personal lives for work like their more assiduous parents were.31 It is unsatisfying and unhelpful to describe associate attrition as a mere “generational issue.” If recent law-school graduates are simply lazier than their forebears, then associate attrition hardly seems like a “problem”; instead, it might be seen as a helpful mechanism for separating out the few ambitious, internally driven members of a generally slothful generation. If, on the other hand, controllable factors such as the structure of partner compensation systems contribute to associate attrition, then law-firm managers may be able to implement reforms capable of stemming the tide of associate departures. Before proceeding to the body of my Article, I need to provide an important caveat. By arguing that law firms are caught in a tragedy of the commons, I do not intend to suggest that my “tragedy of the commons” analysis is the only viable explanation of associate attrition. Indeed, it seems that associate attrition is an over-determined phenomenon with multiple causes. My Article is simply meant to provide one possible explanation of the seemingly self-defeating cycle in which law firms respond to high attrition rates by boosting salaries and billable hours requirements, thereby producing greater attrition. My Article is divided into three parts. Part I reviews the most recent data on associate attrition and addresses the question of whether associate turnover is really a “problem” for law firms. 31 See, e.g., Michael Cameron, Young U.S. Lawyers Keen To Get a Life, AUSTRALIAN (Austl.), June 30, 2006, at 28 (quoting a Chicago lawyer who opined that the problem of associate attrition “stems from a poor work ethic among young people in general, the products of the ‘entitlement generation’ who give greater priority to web surfing and gossiping than producing high-quality work”); Ashby Jones, Law-Firm Life Doesn’t Suit Some Associates, WALL ST. J., May 2, 2006, at B6; Stefanie Romine, Gen Y Workers Want Balance, CINCINNATI ENQUIRER, Oct. 31, 2007, at 1E. 57 Spring 2008 Part II introduces the analytical framework of the “tragedy of the commons” and explains how partner-compensation systems may contribute to undesirably high rates of associate attrition. Part III proposes potential solutions to the tragedy of the commons that force partners to “internalize” the costs of associate turnover. I. A Problem: Associate Attrition A. Recent Data on Associate Attrition Associate attrition is a surprisingly difficult phenomenon to study empirically. Many law firms do not maintain adequate records to track the extent and costs of attrition,32 and the firms that do keep such records may be reluctant to share their internal data.33 The NALP Foundation’s Keeping the Keepers II is perhaps the most comprehensive and detailed nationwide study of associate attrition rates currently available.34 The study examined associate hiring and departures from 1998 to 2003 as reported by a sample of eighty-four law firms located in major metropolitan areas throughout the United States.35 The study found that an 32 See, e.g., HARRINGTON & HSI, supra note 26, at 30 (“[O]f the 50 law firms responding to the survey on Rates of Attrition in Massachusetts Law Firms, none systematically collects information on their attrition costs . . . .”). 33 In preparation for its Keeping the Keepers II study on associate attrition, the NALP Foundation distributed survey forms to 804 law offices nationwide. Only eighty-four completed data sets were returned, producing a response rate of slightly more than 10%. NALP, KEEPING THE KEEPERS II, supra note 2, at 121-22. For its follow-up study, Toward Effective Management of Associate Mobility, the NALP Foundation distributed a survey to 253 law firms and received responses from eighty- four—a 33% response rate. NALP, TOWARD EFFECTIVE MANAGEMENT, supra note 12, at 10. In its study of associate attrition in Massachusetts law firms, the MIT Workplace Center distributed surveys to the hundred largest law firms in Massachusetts and received fifty completed responses, yielding a response rate of 50%. HARRINGTON & HSI, supra note 26, at 6. Because these surveys did not employ random sampling and did not yield 100% response rates, they are subject to the possibility of nonresponse bias. See RICHARD D. DE VEAUX, PAUL F. VELLEMAN & DAVID E. BOCK, STATS: DATA AND MODELS 247 (2005) (defining nonresponse bias as “[b]ias introduced into a sample when a large fraction of those sampled fail to respond” and noting that “[t]hose who do respond are likely to not represent the entire sample”). 34 NALP, KEEPING THE KEEPERS II, supra note 2. 35 Id. at 11, 119. Vol. 1, Issue 1 58 average of 8.4% of entry-level associates36 left their law firms within sixteen months of their start dates.37 Almost 23% of entry- level hires departed within twenty-eight months, 35.1% departed within forty months, 44.9% left within fifty-two months, and 53.4% left within fifty-five months.38 The study found similar levels of attrition among so-called “lateral associates.”39 On average, 18.9% of laterals left their law firms within twenty-four months of their start dates, and within sixty-three months, 65.3% of laterals had departed.40 Interestingly, the study found that the lowest attrition rates were in the largest law firms of more than 500 attorneys, but the study authors noted that this finding was an anomaly that significantly departed from the findings of earlier studies of associate attrition.41 The survey respondents reported higher levels of attrition among female associates than among male associates. While 32.9% of entry-level male hires left their law firms within forty months of their start dates, 37.9% of entry-level females departed 36 An “entry-level” associate is one who begins working at a law firm immediately upon graduation from law school or after finishing a post- graduation judicial clerkship. See id. at 21-38. 37 Id. at 24. 38 Id. 39 A “lateral associate” is one who had post-graduation legal work experience (other than a judicial clerkship) before joining his or her current law firm. See id. at 41-53. 40 Id. at 46. The study also found that 35.1% of laterals departed within thirty-six months of their start-dates, 45.8% left within forty-eight months, and 56.9% departed within sixty months. Id. 41 Id. at 22, 33. The attrition rates of large law firms were especially low compared to the attrition rates of midsized firms, which had the highest average attrition rates in the study. Among entry-level hires in firms with more than 500 attorneys, the NALP Foundation found that 6.1% of the associates departed within sixteen months, 18.2% departed within twenty- eight months, 29.5% departed within forty months, 39.2% departed within fifty-two months, and 46.7% departed within fifty-five months. Id. at 24. Among entry-level hires in firms with 251 to 500 attorneys, however, the NALP Foundation found that 12.4% of the associates departed within sixteen months, 29.3% departed within twenty-eight months, 43.1% departed within forty months, 53.6% departed within fifty-two months, and 63.2% departed within fifty-five months. Id. Large law firms also retained higher percentages of their lateral hires than their smaller counterparts. See id. at 46. As noted in the text, this finding appears to have been anomalous and may have been affected by the uncertain economic climate that prevailed in the United States from 1998 to 2002. See id. at 16. 59 Spring 2008 within the same time period.42 Similarly, 37.1% of lateral females departed within thirty-six months while only 33.7% of lateral males did so.43 Attrition rates were also higher among minorities than among nonminorities. While 68% of minority male entry- level associates departed within fifty-five months, the average attrition rate for all male entry-level hires at this point was only 52.3%.44 Furthermore, 77.4% of minority female laterals departed within sixty-three months while the average departure rate for all female laterals at this point was only 68.3%.45 Keeping the Keepers II thus provides some support for the conventional view that law firms need to bolster their efforts to retain female and minority associates.46 Overall, Keeping the Keepers II presents a comparatively rosy picture of associate attrition. The NALP Foundation found that entry-level associate attrition was lower in its 2003 study than in two previous studies conducted in 1997 and 2000.47 In fact, the attrition data presented in Keeping the Keepers II were largely in line with statistics reported by Robert Nelson in the 1980s.48 The NALP Foundation’s most recent report on associate 42 Id. at 24-25. By the fifty-five month mark, the difference in attrition rates between male and female entry-level hires had declined but had not disappeared. The study found that 52.3% of male entry-level hires left their firms within fifty-five months while 54.9% of female entry-level associates departed within the same time period. Id. 43 Id. at 47. By the sixty-three month mark, 68.3% of female laterals and 63.4% of male laterals had departed. 44 Id. at 24-25. More than 64% of entry-level minority females departed within fifty-five months, compared with an average attrition rate at this point for all females of 54.9%. Id. at 25-26. 45 Id. at 47-48. At the sixty-three month mark, the average departure rate for all males was 63.4% while the average departure rate for minority males was 68.9%. Id. 46 See NALP, KEEPING THE KEEPERS II, supra note 2. See generally Philip L. Harris, A Candid Discussion: Enhancing the Status of Black Partners, CHI. LAW., July 2007, at 20,008 (discussing barriers to African American advancement at law firms); LAUREN STILLER RIKLEEN, ENDING THE GAUNTLET: REMOVING BARRIERS TO WOMEN’S SUCCESS IN THE LAW (2006) (examining the slow pace of female advancement in law firms and suggesting changes that law firms can implement to increase retention of female attorneys). 47 NALP, KEEPING THE KEEPERS II, supra note 2, at 97-98. 48 See ROBERT L. NELSON, PARTNERS WITH POWER: THE SOCIAL TRANSFORMATION OF THE LARGE LAW FIRM 137-41 (1988). Nelson studied the hiring decisions and turnover rates of nineteen of Chicago’s twenty largest firms for the years 1971 to 1983. Id. at 187. According to Nelson’s calculations, approximately 45 to 51% of the associates hired from 1971 to Vol. 1, Issue 1 60 attrition, however, suggests that law-firm managers cannot become complacent about associate turnover. In Toward Effective Management of Associate Mobility, the NALP Foundation reports that from 2002 to 2004, the eighty-four law firms49 participating in its study experienced an average annual attrition rate of 19%, “the highest rate documented by any . . . NALP Foundation study.”50 This finding means that on average, approximately one out of every five associates who are employed by a firm on January 1 will have departed by the end of the year. The NALP Foundation also found that attrition increased in each subsequent year of its study, “beginning with a 16% average attrition rate in 2002, 18% in 2003 and 20% in 2004.”51 It is impossible to know for certain whether these statistics indicate a long-term trend toward higher attrition rates, or whether they represent a short-term hiccup that will level off or decline over time. As the NALP Foundation admits, the data presented in Keeping the Keepers II were likely affected by the unique events that occurred during the study years, such as the bursting of the dot-com bubble and the economic malaise following the September 11, 2001 terrorist attacks.52 Similarly, the recent uptick in attrition rates may simply reflect the loosening of the labor market as the nation’s economy improved following a 1976 had left their firms by 1984. Id. Nelson also found that “[o]ver half the associates joining firms in 1980 . . . had left by 1984.” Id. Furthermore, “[f]ully 30% of associates hired in 1982 were gone within two years; and almost one in five (18%) of the 1983 cohort stayed less than a year.” Id. at 137. Although these attrition rates are broadly similar to the attrition data reported in Keeping the Keepers II, Nelson’s findings are not directly comparable to the results of the NALP Foundation’s study. First, Nelson relied on listings in the Martindale-Hubbell attorney directory to compile his data set, id. at 187, and as Marc Galanter and Thomas Palay explain in Tournament of Lawyers, Martindale-Hubbell listings are not entirely reliable for purposes of gauging firm size and attrition rates. MARC GALANTER & THOMAS PALAY, TOURNAMENT OF LAWYERS: THE TRANSFORMATION OF THE BIG LAW FIRM 141-43 (1991). More importantly, Nelson studied only the largest firms in a single city, Chicago, and did not differentiate between the attrition rates of entry-level hires and lateral associates. NELSON, supra, at 137 The NALP Foundation, on the other hand, distributed surveys to small, midsized, and large law firms throughout the nation and did distinguish between the attrition rates of entry-level and lateral associates. NALP, KEEPING THE KEEPERS II, supra note 2. 49 NALP, TOWARD EFFECTIVE MANAGEMENT, supra note 12, at 10. 50 Id. at 16. 51 Id. at 10. 52 Id. at 16-17. 61 Spring 2008 brief recession in 2001.53 Nevertheless, the NALP Foundation cautiously concluded in Toward Effective Management of Associate Mobility that attrition is a “growing, although apparently manageable problem for legal employers.”54 Aside from indicating an increase in associate attrition rates, Toward Effective Management of Associate Mobility also demonstrates that associates waste little time in reaching their decisions to leave. The study found that 15% of entry-level associates who left their firms did so within two years of their start dates.55 Forty percent of departing entry-level hires left within three years, and 78% of departures occurred within an entry-level associate’s first five years with a firm.56 Over three-quarters of departing entry-level associates thus leave their firms well before partnership decisions are made.57 Even if we assume that most of the departing associates would eventually have been forced to leave under an “up-or-out” partnership model,58 early attrition is 53 See Economists Call It Recession, CNN MONEY, Nov. 26, 2001, http://money.cnn.com/2001/11/26/economy/ recession/index.htm. 54 NALP, TOWARD EFFECTIVE MANAGEMENT, supra note 12, at 8. The report’s authors did not clarify what they meant by “manageable.” Since the NALP Foundation did not attempt to calculate the costs of associate attrition, its data do not reflect whether associate attrition rates are negatively impacting firms’ profitability. The NALP Foundation’s findings mirror Robert Nelson’s conclusion in the 1980s that associate turnover was “likely . . . increasing.” NELSON, supra note 48, at 139. For more information about Nelson’s study of associate attrition, see supra note 48 and accompanying text. 55 NALP, TOWARD EFFECTIVE MANAGEMENT, supra note 12, at 21. 56 Id. The speed of departures is even more startling among lateral associates. The NALP Foundation found that 25% of laterals who left their law firms did so within two years of their start dates. Fifty-two percent departed within three years, 69% departed within four years, and 84% left within five years. Id. at 27. 57 See, e.g., HARRINGTON & HSI, supra note 26, at 7 (reporting a median partnership track of 9.5 years for survey respondents in a study of attorney career decisions). 58 The “up-or-out” rule requires associates who do not make partner to leave the firm. GALANTER & PALAY, supra note 48, at 25. Traditionally, firms have helped associates passed over for partnership secure jobs with the firms’ client corporations or with smaller law firms. Id. at 29. Although the up-or-out rule is often seen as a defining feature of law-firm culture, Marc Galanter and Thomas Palay note that it is “easy to overestimate the rigor” with which the rule is applied. Id. at 28. Vol. 1, Issue 1 62 robbing firms of years of possible returns on their investments in human capital.59 The NALP Foundation’s findings compare favorably with the results of other studies of associate attrition. As mentioned above, the MIT Workplace Center surveyed a sample of attorneys who graduated from law school after 1986 and worked at one of the hundred largest law firms in Massachusetts in 2001.60 The Center found that about half of both male and female associates left their firms sometime between the beginning of 2001 and the end of 2005.61 Furthermore, a study by the nonprofit research group Catalyst found that 62% of female associates and 47% of male associates intend to stay with their current firms for five years or less.62 These findings largely mirror the results of the After the JD study, which found that 55% of respondents in law- firm offices of more than 250 attorneys intended to change jobs within two years.63 Where do associates go after they leave? The available data suggest that most departing associates accept positions with other law firms. In Toward Effective Management of Associate Mobility, the NALP Foundation found that 49% of departing associates “left their law-firm employers for jobs with other law firms.”64 The study also found that departing male associates were more likely to take law-firm jobs than departing females. While 54% of departing entry-level males moved to new law firms, only 46% of departing entry-level females left to join a different 59 It is not surprising that some associates who believe that their partnership prospects are not bright might choose to leave before partnership decisions are made. If the associates wait too long, they risk being considered “lemons” by potential employers because they were not promoted to partner. What is striking, however, is how quickly associates reach their departure decisions. The sooner an associate leaves, the less chance a firm has to recoup its investment in recruiting and training the associate. 60 HARRINGTON & HSI, supra note 26, at 6. 61 Id. at 8-9. 62 CATALYST, BEYOND A REASONABLE DOUBT: BUILDING THE BUSINESS CASE FOR FLEXIBILITY 4 (2005), available at http://www.catalyst.org/files/full/canadalaw3%2014%2005%20FINAL.pf 63 AFTER THE JD, supra note 9, at 54. Forty-five percent of respondents in law-firm offices of 101 to 250 attorneys said that they intended to change jobs within two years, and 41% of respondents in law-firm offices of twenty- one to one hundred attorneys expressed a similar intent. The respondents had been out of law school for approximately three years at the time the survey was conducted. See id. at 89-90 (describing the survey methodology). 64 NALP, TOWARD EFFECTIVE MANAGEMENT, supra note 12, at 41. 63 Spring 2008 law firm.65 Minorities were also somewhat less likely to depart to another law firm, but the differences between minorities and nonminorities on this score were rather small.66 The MIT Workplace Center’s study of the career decisions of Massachusetts attorneys confirms that not all lawyers who leave their law firms intend to leave firm practice. The study found that about 25% of female associates and about 30% of male associates changed law firms at least once during the years of 2001 to 2005.67 On the other hand, about 31% of female associates and about 18% of male associates left firm practice during this time period.68 Of those pre-partner women and men who left firm practice, the plurality accepted positions as in-house counsels for corporations.69 In sum, most departing associates merely move from one law firm to another, and of those who do leave firm practice, a large number “go in-house,” performing legal functions for the same corporations that hire law firms to carry out discrete legal tasks. These findings suggest that associate attrition does not necessarily result from the fact that departing associates “aren’t cut out” for firm practice. Given the high percentage of departing associates who move to other law firms or positions as in-house counsels, it appears that at least some of these departures could be prevented through the implementation of more effective retention strategies. B. The Costs of Associate Attrition i. Is Associate Attrition Really a “Problem”? Associate attrition rates are high and likely increasing. Furthermore, it seems that with some effort, firms could substantially improve their retention of young associates. Why, then, have firms not devoted more time and resources to tackling 65 Id. at 45. The difference between male and female departure destinations was even more pronounced among departing laterals. While 56% of departing male laterals moved to new law firms, only 39% of departing female laterals did so. Id. 66 Id. at 46. While 51% of departing nonminority entry-level associates moved to different law firms, only 48% of minority entry-level associates did so. Furthermore, 46% of departing minority laterals took jobs with new law firms, compared to 49% of departing nonminority laterals. Id. 67 HARRINGTON & HSI, supra note 26, at 9. 68 Id. 69 Id. at 10. Vol. 1, Issue 1 64 the problem of associate attrition? The answer may be that firms consider associate attrition not as a “problem” but as a necessary cost of doing business. Since not all associates can make partner, some attrition is to be expected. Associate turnover is thus a vital component of the law-firm business model. Marc Galanter and Thomas Palay have argued that law firms are structured around a “promotion-to-partner tournament,” and they have used this theory to explain the exponential growth of large law firms in the past half century.70 Galanter and Palay view a law firm as a mechanism for the sharing of human capital.71 Seasoned attorneys may have “surplus” human capital insofar as they are able, based on their experience, training, reputation, and client relationships, to generate more legal work than they are able to complete on their own given their limited supply of personal labor.72 Inexperienced attorneys, on the other hand, may have surplus labor because they lack the skills, training, reputation, and expertise necessary to attract much legal work.73 Both a seasoned and an inexperienced attorney would be better off if they could design a way for the seasoned attorney to rent or sell her surplus capital to the inexperienced lawyer, who has the surplus labor necessary to put the capital to productive use.74 For example, the seasoned attorney could solicit work from an established client and then assign the work to the inexperienced lawyer. The seasoned attorney would offer her own reputation as a guarantee to the client that the inexperienced lawyer would produce a satisfactory work product, and the seasoned attorney might share additional capital with the inexperienced attorney by providing advice and guidance as the inexperienced attorney attempted to complete the project. In the end, the seasoned attorney would pay the inexperienced attorney “the marginal product of his labor and capital as a wage” and would retain the remainder of the client’s fee as compensation for her capital investment.75 In a world without transaction costs, seasoned and inexperienced attorneys could simply enter into ad hoc capital- sharing contracts, and the need to create law firms would never 70 GALANTER & PALAY, supra note 48, at 77-120. 71 See id. at 89. 72 Id. at 89-91. 73 See id. at 92. 74 See id. 75 Id. 65 Spring 2008 arise.76 Unfortunately, however, the “world without transaction costs” is a fairytale, and a number of barriers impede the effective sharing of human capital outside the safe confines of the law-firm structure. Seasoned attorneys may fear that the inexperienced attorneys with whom they contract will “grab” their assets by, for example, stealing their clients.77 Seasoned attorneys may also be concerned that inexperienced lawyers will prematurely “leave” the relationship, departing before the seasoned attorney has fully amortized her initial investment of human capital.78 Finally, a seasoned attorney might worry that the inexperienced attorney will “shirk,” producing a mediocre work product that may harm the seasoned attorney’s reputation and produce an inferior return on her capital investment.79 Inexperienced attorneys, on the other hand, may fear that seasoned lawyers will not fairly compensate them for their labor and any capital investments they may make on the seasoned lawyer’s behalf.80 As a result, a seasoned attorney will not share her surplus human capital with an inexperienced lawyer unless a mechanism is established whereby she can effectively monitor the inexperienced lawyer’s performance and behavior.81 Similarly, an inexperienced attorney will not supply a seasoned attorney with his surplus labor unless the seasoned attorney can credibly commit to fully compensate the inexperienced attorney for his work.82 The law firm is the mechanism by which seasoned and inexperienced attorneys overcome these obstacles to the efficient sharing of human capital. To deter grabbing, shirking, and leaving by inexperienced lawyers, law firms implement a system of deferred compensation in which inexperienced lawyers spend a number of years as salaried “associates” before they become eligible “for a ‘super-bonus,’ consisting of promotion to partnership.”83 This “promotion-to-partner tournament” gives inexperienced attorneys an incentive to provide the firm with their maximum effort in the hope that their work will be rewarded with the lucrative prize of partnership status.84 In addition, because 76 Id. at 93. 77 Id. at 94. 78 Id. 79 Id. at 94-96. 80 Id. at 96-97. 81 Id. at 96. 82 Id. at 96-97. 83 Id. at 100. 84 Id. at 100, 101. Vol. 1, Issue 1 66 inexperienced attorneys can easily observe how the firm awards partnerships to associates in the classes ahead of them, they will be less fearful that the firm will renege on its promise to compensate the most productive associates with equity shares in the firm.85 In this way, law firms quell fears of opportunistic behavior and thus facilitate the sharing of human capital and labor between seasoned and inexperienced attorneys.86 Associate attrition is an almost inevitable byproduct of the promotion-to-partner tournament. In fact, Gilson and Mnookin assert that law firms have traditionally followed a strict “up-or- out” system in which they almost never retain associates who are not promoted to partnership.87 According to Gilson and Mnookin, the up-or-out rule is a bonding mechanism that allows firms to credibly commit not to “cheat” hardworking associates by opportunistically offering them permanent salaried positions even though they actually qualify for promotion to partnership.88 Although Galanter and Palay find Gilson and Mnookin’s analysis “thoughtful and interesting,”89 they note that it is “easy to overestimate the rigor with which the up-or-out rule” is applied.90 Faced with a competitive market for top legal talent, firms seem increasingly willing to allow attorneys who are passed over for partnership to stay on as “permanent associates.”91 85 Id. at 101-02. 86 Galanter and Palay offer the “promotion-to-partner tournament” as an explanation for the exponential growth of law firms. Id. at 102-103. According to Galanter and Palay, law firms typically promote a fixed percentage of each “entering class” of associates to partner. Id. at 103. Firms are loath to tamper with their promotion percentages because they fear upsetting the implicit deferred compensation agreement that incentivizes associates to provide maximum effort on the firm’s behalf. See id. As long as firms promote a fixed number of associates to partner each year and then hire new associates to maintain a constant or increasing associate-to-partner ratio, they are almost guaranteed to experience exponential growth. See id. at 108. 87 Ronald J. Gilson & Robert H. Mnookin, Coming of Age in a Corporate Law Firm: The Economics of Associate Career Patterns, 41 STAN. L. REV. 567, 567, 575 n.28 (1989). 88 See id. at 576-81. 89 GALANTER & PALAY, supra note 48, at 100 n.46. 90 Id. at 28. 91 See Peter D. Zeughauser, A United Front; One Way to Make Sure That a Firm’s Personnel Policies Support Its Business Strategies: Combine Its Marketing and Human Resources Function, AM. LAW., Aug. 2006, at 61, 61 (“At all but a few firms, the up-or-out talent development model has been replaced by a multiclass structure that includes nonequity partners, permanent associates, and contract lawyers.”). 67 Spring 2008 Despite the recent erosion of the traditional up-or-out paradigm, attrition remains a central component of the law-firm business model. Law firms generate profit by buying associates’ labor at “wholesale” and selling it to clients at “retail.”92 Under the traditional “Rule of Thirds,” one-third of the revenue generated by an associate is used to pay his salary and benefits, one-third is used to pay overhead, and the remaining third goes to the partners as profit.93 Since associates are law firms’ cash cows, firms maximize their profitability by maintaining high associate- to-partner ratios.94 Because firms wish to keep their associate classes large and their partnership ranks small, they promote only a small percentage of their associates to partner. Furthermore, firm managers could conceivably have good economic reasons for wanting at least some associates to depart well before partnership decisions are made. Assuming that an associate’s salary increases at a faster pace than his billing rate, an associate’s profitability may decline as his tenure with the firm increases. A firm might reasonably prefer to pay a first-year associate $160,000 to bill at a rate of $300 per hour than to pay a fifth-year associate $240,000 to bill at a rate of $400 per hour.95 To the extent that the fifth- year associate’s departure frees up resources that can be used to hire additional entry-level associates, the firm might view the departure as a blessing, not a curse.96 92 Ronald J. Gilson & Robert H. Mnookin, Sharing Among the Human Capitalists: An Economic Inquiry into the Corporate Law Firm and How Partners Split Profits, 37 STAN. L. REV. 313, 350 (1985). 93 S.S. Samuelson & L.J. Jaffe, A Statistical Analysis of Law Firm Profitability, 70 B.U. L. REV. 185, 193-94 (1990). 94 See, e.g., Two-Tier Partnerships: Exclusive Insights Illustrate Why Law Firms Make the Switch, COMPENSATION & BENEFITS FOR L. OFFS., Sept. 2007, at 1, 1 (“Increasing associate-to-partner leverage is, for the vast majority of firms, a crucial part of their overall economic strategy.”). 95 If the first-year associate in my example bills 2000 hours, he will generate revenue of $600,000, and his yearly salary of $160,000 will account for only 26.7% of the revenue he generates. If the fifth-year associate bills 2000 hours, however, he will generate revenue of $800,000, and his annual salary of $240,000 will account for 30% of the revenue he generates. In this case, then, the law firm would make more profit from the first-year’s work than the fifth-year’s work. 96 See generally NALP, KEEPING THE KEEPERS II, supra note 2, at 15 (listing reasons why associate attrition is “a fact of life in law firms”). Vol. 1, Issue 1 68 ii. Calculating the Costs of Attrition The analysis in the previous subsection suggests that associate attrition may simply be the natural consequence of the efficient exploitation of associate labor by profit-maximizing firms. Before acceding to this view, however, it is essential to consider carefully the substantial costs that attrition imposes on firms. Even if some attrition is to be expected, a firm’s attrition rate may rise so high that the marginal cost of attrition is greater than its marginal benefit to the firm in terms of increased revenue. This insight suggests that some law firms may have inefficiently high attrition rates, which in turn raises the possibility that firms could increase their profitability by implementing measures to bolster associate retention. The available data suggest that associate attrition is a costly phenomenon. It is estimated that the cost of replacing a departing attorney ranges from $200,000 to $500,000.97 Furthermore, it may take three to four years for a firm to recoup the costs it sinks into recruiting and training a new associate.98 If accurate, these figures suggest that law firms may lose money on more than a third of their new hires.99 In one of the most thorough studies of the costs of associate turnover, the nonprofit research group Catalyst worked with the Toronto offices of four major Canadian law firms to develop a comprehensive model of the costs of attrition.100 In Catalyst’s 97 WILLIAMS & CALVERT, supra note 13, at 7; see also Newman, supra note 14, at 50-52. 98 WILLIAMS & CALVERT, supra note 13, at 8; see also Associate Management, supra note 14, at 4 (“It takes three to five years for partners to break even with new lawyers.”). 99 See NALP, KEEPING THE KEEPERS II, supra note 2, at 24 (noting that 35.1% of all entry-level hires leave their law firms within forty months of their start-dates). 100 CATALYST, supra note 62, at 3. The process for recruiting law-firm associates in Canada differs from the American recruitment model. Most importantly, Canada requires students to complete a year of “articling” before they are eligible to “be called to the Bar.” Id. at 38. Although summer and articling students record the time they spend working on client files, “[m]any of the hours generated . . . by summer and articling students are written off as a necessary training and development expense.” Id. Canada’s longer apprenticeship period might cause the upfront training costs of Canadian firms to be higher than the upfront training costs of American firms. American firms, however, must provide similar training to young associates during their early years with the firm. Furthermore, American firms may be forced to write off at least some of the hours billed by young associates given their inexperience. Given the high compensation 69 Spring 2008 model, turnover costs are equal to the sum of “investment costs,” which include recruitment and training costs, and “separation costs,” which include such costs as the labor costs for exit interviews and the opportunity costs resulting from the decrease in a departing associate’s productivity from the time he decides to leave to the day he actually departs.101 Using this formula, Catalyst calculated that the average total cost of an associate’s departure for the four firms in its study was $315,000 (Canadian), “approximately twice the average associate’s salary.” 102 Catalyst also calculated that the average “breakeven point”103 for an associate was 1.8 years.104 In other words, the average associate did not become profitable until near the end of his second year. In sum, the available data indicate that it costs firms hundreds of thousands of dollars when an associate walks out the door. Furthermore, the studies suggest that a substantial percentage of associates leave their firms before they become profitable. These “early departers” represent net losses to the firm. iii. How High Is Too High When It Comes to Attrition Rates? Although some attrition is to be expected in a law firm, the difference between the costs of an acceptable level of attrition and a firm’s actual turnover costs can be quite dramatic. Consider a firm with 200 associates. Let’s assume that an acceptable attrition paid to American summer associates and the exorbitant sums that American firms spend on recruiting, there is no reason to think that turnover costs in the United States would be significantly lower than turnover costs in Canada. Indeed, the costs of attrition may very well be higher in the United States. 101 Id. at 10-12. 102 Id. at 9. 103 “The breakeven point is the point at which revenues generated by an associate equal the cost of recruitment, training (investment costs), and the potential cost of departure from the firm (separation costs).” Id. at 9; see also id. at 15. 104 Id. at 9. Catalyst found some variability in breakeven points across the four study participants. “The figures ranged from one firm that saw associates break even almost immediately after they began their tenure as junior associates . . . to another firm that did not see their associates break even until they reached their fourth year as an associate.” Id. at 15. According to Catalyst, “[t]he differences in the firms’ breakeven points are due largely to differences in revenue generation among the four firms (i.e., differences in firms’ billable rates and billable hours).” Id. Vol. 1, Issue 1 70 rate for this firm is 10%. Following the Catalyst data, let’s also assume that the average cost of an associate departure is $315,000.105 At an acceptable rate of attrition, the firm would thus incur $6,300,000 in turnover costs each year.106 If, however, the firm instead has an actual turnover rate of 25%, then the firm’s annual turnover costs are $15,750,000.107 The difference between the firm’s actual and acceptable turnover costs would be $9,450,000.108 To put these numbers in context, let’s consider how these additional turnover costs would affect the balance sheet of an actual firm. The Dallas-based firm Haynes & Boone currently ranks 105th on American Lawyer’s list of the 200-top grossing law firms in the United States, and the firm generated $235,500,000 in gross revenue in 2006.109 Much like the law firm in my example, Haynes & Boone has slightly over 200 associates.110 With an actual attrition rate of 25%, a firm like Haynes & Boone could thus expect to spend about 7% of its revenue on turnover costs.111 If the firm’s “acceptable” level of turnover were 10%, then approximately 4% of the firm’s gross revenue would be consumed by “unacceptable” attrition-related expenses.112 The Catalyst study lists a number of factors that firms should consider when evaluating whether their attrition rates are undesirably high. For example, attrition may be welcome when a firm is experiencing excess capacity because of an economic downturn, but associate turnover may be undesirable when it occurs in a profitable practice area with a growing caseload. 113 Firms must also consider the individual work records of their 105 For purposes of my example, I ignore the fact that the Catalyst data were collected in 2003 and were calculated in terms of Canadian dollars. See id. at 25. If exchange and inflation rates were taken into account, the numbers in my example would be somewhat different, but the lesson would remain the same: inefficiently high attrition rates cost firms substantial amounts of money. 106 200 x 0.1 x $315,000 = $6,300,000. 107 200 x 0.25 x $315,000 = $15,750,000. 108 $15,750,000 - $6,300,000 = $9,450,000. 109 Revenues on the Rise, AM. LAW., June 2007, at 141, 141. 110 Haynes & Boone currently employs approximately 218 associates, but for consistency’s sake, I will continue to use the 200 figure in my calculations. Haynes & Boone, http://www.haynesboone.com/people (last visited Mar. 31, 2008) (listing 218 names under the “position” title of “associate”). 111 $15,750,000 / $235,500,000 = 0.067 = 6.7%. 112 $9,450,000 / $235,500,000 = 0.040 = 4.0%. 113 CATALYST, supra note 62, at 16-17. 71 Spring 2008 departing associates. As Catalyst explains, “[l]osing a productive associate from a busy practice area to a competitor represents a greater cost to a firm and may not be acceptable, whereas losing a weaker associate in a slower area to a different market player might be more acceptable.” 114 Finally, firms must not overlook the “indirect” or “intangible” costs of associate turnover. Clients may become dissatisfied when the attorneys working on their cases are constantly changing, and high rates of associate departures may lower the morale of those associates who do not leave the firm.115 Because these costs are difficult to measure, they are not fully accounted for in Catalyst’s turnover cost model, which suggests that the actual long-term cost of associate attrition may be even higher than the $315,000 estimate provided in the Catalyst study.116 Perhaps the best evidence that associate attrition rates are inefficiently high is the fact that law firms appear to be increasingly worried about associate turnover. As explained in the Introduction, periodicals focusing on issues of law-firm management are filled with articles discussing the problem of associate attrition and suggesting means by which managers can improve their retention of productive associates.117 In addition, at least one elite New York law firm has responded to its high attrition rates by holding a crash course on etiquette for its partners, and law firms continue to spend thousands of dollars to attend commercial seminars promising to help them reduce their number of associate departures.118 It appears that law firms have reason to be concerned about their attrition rates. Ron Beard, a legal consultant and former managing partner of Gibson, Dunn & Crutcher, estimates that firms of 250 lawyers or more are losing about 20% of their associates per year, which is about five to ten percentage points higher than the level of associate attrition that firms would prefer to maintain.119 According to Beard, associate attrition is making it more difficult for firms to maintain high associate-to-partner ratios, and as explained above, maintaining or increasing associate-to-partner leverage is a crucial component of a firm’s 114 Id. at 17. 115 Id. 116 See id. 117 See supra note 14 and accompanying text. 118 See supra notes 15-16 and accompanying text. 119 Elizabeth Goldberg, Exit Strategy, AM. LAW., Aug. 2006, at 110, 112. Vol. 1, Issue 1 72 business strategy.120 Law firms report that over half of associate departures each year are “unwanted,”121 and a recent survey conducted by American Lawyer indicates that poor associate retention is one of the greatest disappointments of law-firm leaders.122 As the NALP Foundation concludes in Keeping the Keepers II, the legal profession’s continued interest in the topic of associate turnover suggests that the issue is significant and thus merits further study.123 C. Why Are So Many Associates Leaving? What causes associates to leave their law firms? Do they depart for purely personal reasons, such as a desire to pursue a new practice interest or to move to a new city? Or do they become disillusioned with the workload pressures of law-firm life and thus move to jobs that provide for a more manageable work-life balance? In its two most recent studies of associate turnover, the NALP Foundation attempted to answer these questions by asking the law firms it surveyed to provide reasons for their associates’ departures. Unfortunately, in Toward Effective Management of Associate Mobility, the reasons listed for 57% of entry-level departures were either “unknown” or “other.”124 The next most common reason for departure was “unmet performance standards,” which firms listed as a reason for 20% of their entry- level departures.125 According to the firms’ responses, 14% of entry-level associates left to pursue different practice interests.126 Although 10% of associates left to pursue better work-life balance, this reason was listed more commonly in the case of departures by female associates than by male associates.127 Only 2% of entry- level associates left their firms for higher compensation or bonuses.128 120 See id.; see also supra note 94 and accompanying text. 121 Goldberg, supra note 18, at 93. 122 Goldberg, supra note 119, at 113. 123 See NALP, KEEPING THE KEEPERS II, supra note 2, at 15. 124 NALP, TOWARD EFFECTIVE MANAGEMENT, supra note 12, at 36. 125 Id. 126 Id. 127 “Pursuit of better work-life balance” was listed as a reason in 15% of entry- level female departures. It was listed as a factor in only 8% of male entry- level departures. Id. 128 Id. 73 Spring 2008 Similarly, Toward Effective Management of Associate Mobility reported that the reasons for 54% of lateral departures were either “unknown” or listed as “other.”129 Twenty-five percent of laterals left because of unmet performance standards while 11% left to pursue different practice interests.130 Nine percent left their firms because of a desire for a better work-life balance,131 and only 3% left for higher compensation or bonuses.132 In Keeping the Keepers II, NALP’s law-firm respondents provided similar explanations for their associates’ departures. For 37% of entry-level departures, the reasons for departure were either “unknown” or listed as “other.”133 Again, “unmet performance standards” proved a popular response; it was listed as a reason in 20.4% of entry-level departures.134 According to the firms’ responses, 6.1% of entry-level associates left because of billable hours pressures, and only 1.9% left for better compensation.135 The utility of NALP’s figures is undermined by the high percentage of departures for which reasons were “unknown” or listed as “other.” In fact, the most important lesson to be drawn from the NALP data may be that law firms do not do a particularly good job of tracking the reasons for associate departures. Fortunately, other studies have asked the departing attorneys themselves about their reasons for leaving rather than relying on the data provided by firms. The MIT Workplace Center’s study of attorneys in the top hundred Massachusetts law firms, for example, considered the reasons for departure of all attorneys leaving firm practice, whether associates, income partners, or equity partners.136 The study found that almost 60% of respondents who left firm practice said that they did so because of 129 Id. at 39. 130 Id. 131 Again, a higher percentage of female lateral associates left their firms to pursue a better work-life balance than did their male counterparts. While 12% of female laterals left their firms because of issues related to work-life balance, only 7% of male laterals did so. Id. 132 Id. 133 NALP, KEEPING THE KEEPERS II, supra note 2, at 64. 134 Id. 135 Id. For 49.7% of lateral departures, the reason for the departure was either “unknown” or listed as “other.” The study also found that 21.5% of laterals left because of unmet performance standards, 8.9% left because of geographic preference, 3.7% left because of billable hours pressures, and 1.7% left in pursuit of better compensation. Id. at 65. 136 HARRINGTON & HSI, supra note 26, at 12-13. Vol. 1, Issue 1 74 “long work hours,” and over 50% gave “work load pressures” as a reason for departure.137 Almost 20% of men and 30% of women left firm practice because of “lack of flexibility in work hours,” and over 40% of men and 60% of women left because of the difficulty they experienced with integrating their work with their personal or family lives.138 In addition, about 30% of respondents left firm practice to escape an “unsupportive work environment.”139 Much less than 10% of respondents, on the other hand, left firm practice because of the better wages or benefits offered at their next job.140 Among those attorneys who switched law firms rather than leaving firm practice entirely, work-life balance was a less salient concern than promotion opportunities and the quality of the attorneys’ work environment.141 Nevertheless, more than 20% of male “switchers” and more than 30% of female “switchers” listed workload pressures and long work hours as reasons for their change in law firms.142 Again, attorneys who switched law firms seemed more concerned about work-life balance and career advancement than they did about the pursuit of increased compensation.143 The results of Catalyst’s survey of more than 800 Canadian associates support the MIT Workplace Center’s findings. In the Catalyst study, 84% of female associates and 66% of male associates said that they would consider “an environment more supportive of [their] family and personal commitments” as an important factor to consider when deciding whether to work at another law firm.144 Catalyst also found that “four out of five women (81%) and 67% of men indicate more control over their work schedules as important in choosing to work at another firm.”145 Finally, the study shows that a majority of women (66%) 137 Id. 138 Id. 139 Id. 140 Id. 141 See id. at 18-19. Approximately 40% of respondents said that they switched firms because of “poor promotion opportunities” while more than 35% listed an “unsupportive work environment” as a reason for their change in law firms. Id. at 19. 142 Id. at 18-19. 143 Slightly more than 20% of male “switchers” and 15% of female “switchers” listed “better wages/benefits offered in next job” as one of their reasons for changing law firms. Id. at 19. 144 CATALYST, supra note 62, at 5. 145 Id. 75 Spring 2008 and men (54%) consider the possibility of working fewer hours to be an important factor in deciding whether to change law firms.146 These studies suggest that associate attrition is not solely the product of idiosyncratic decisions stemming from associates’ familial obligations or practice area and geographic preferences. Instead, associates routinely cite similar factors when explaining their reasons for departure. These factors include long hours,147 unmanageable workloads, inability to work on projects in the associate’s field of interest, lack of responsibility, opacity about firm finances, lack of guidance about partnership opportunities, and insufficient mentoring and training.148 Interestingly, the data suggest that associates generally do not leave their firms in pursuit of greater compensation. In the remainder of my Article, I will assume that associates are more likely to stay with their firms when they (1) receive engaging assignments in fields that interest them; (2) are permitted to work according to a flexible schedule that leaves sufficient time for them to pursue personal objectives and fulfill familial obligations; (3) are entrusted with a level of responsibility appropriate to their skills, experience, and ability; (4) are provided with mentorship and training by more senior attorneys; and (5) 146 Id. 147 The After the JD study chose to examine the work hours of young attorneys by asking its respondents how many hours they worked in the past week. The median response for all attorneys in firm practice was fifty hours, but the distribution of hours worked became increasingly skewed as the number of attorneys in respondents’ offices increased. In offices of 101 to 250 lawyers, the mean number of hours worked was 51.03, and 28% of young associates in these “mid-sized” offices worked over sixty hours in the previous week. In offices of more than 250 lawyers, the mean number of hours worked was 52.15, and almost one-third (32%) of respondents in these “large” offices worked over sixty hours in the past week. AFTER THE JD, supra note 9, at 36. Furthermore, 39% of respondents in New York City’s largest private offices reported working more than sixty hours in the previous week. Id. at 33. Law-firm associates reported working longer hours than young attorneys in the government, nonprofit, public-interest, and business sectors, id. at 36, and the hours worked by young associates were significantly higher than the national median of forty hours per week. Id. at 33. 148 See Newman, supra note 14, at 52 (“Associates cite several reasons for leaving their firms: ineffective mentoring programs, the opaque road to partnership, work-life balance issues, and lack of training and development.”); see also Aruna Viswanatha, New York State of Mind, AM. LAW., Aug. 2007, at 104, 106-07 (discussing sources of dissatisfaction among associates in New York firms). Vol. 1, Issue 1 76 are given constructive criticism that includes suggestions of ways in which the associate can improve his work product in order to increase his chances of promotion. On the other hand, I will assume that associates are more likely to leave their firms when they feel overworked and undervalued. My central thesis, which I develop in Part II, is that partner-compensation systems that prioritize rainmaking and revenue generation contribute to inefficiently high rates of associate attrition by encouraging partners to overly exploit associate labor while discouraging them from taking steps that could bolster associate retention. II. A Cause: The Tragedy of the Commons A. What is the “Tragedy of the Commons”? In this Article, I examine the problem of associate attrition through the theoretical framework of the “tragedy of the commons.” The tragedy of the commons provides an intuitive yet theoretically powerful explanation for the overexploitation of common-property resources, such as “fish, air, water, and publicly owned parks and forests.”149 In a system of private property, owners “reap the rewards of their successes and suffer the consequences of their failures”; therefore, they have an incentive to manage the use of their resources carefully in order to maximize their net returns from those resources.150 When a resource is instead managed collectively, however, the proper 149 JAMES M. ACHESON, THE LOBSTER GANGS OF MAINE 142 (1988). Acheson distinguishes between “three different kinds of property: private property, communal or jointly owned property, and ‘open access.’” Id. at 143. He offers the case study of Maine’s “lobster gangs” as evidence that the problems of joint ownership can be overcome in the context of a tightly knit community capable of enforcing internal norms and preventing outsiders’ use of the communal resource. Id. Acheson thus argues that the tragedy of the commons occurs primarily in the case of “open access” property, where “no controls at all” are placed on usage of the resource. Id. In many ways, a law firm resembles the lobster-fishing communities studied by Acheson. They both face the problem of how to manage the utilization of a common- property resource (associates in the case of law firms, lobsters in the case of the communities in Acheson’s study). Unfortunately, the lobstermen in Acheson’s study have proved more adept at solving the problem of collective ownership than have the partners of large law firms. In Part III, I discuss how law firms can restructure their partner-compensation systems to promote the efficient exploitation of their communal resource—associate labor. 150 KARL E. CASE & RAY C. FAIR, PRINCIPLES OF MACROECONOMICS 454 (7th ed. 2004). 77 Spring 2008 incentives for efficient use of the resource might not exist “because individuals do not bear the full costs of their own decisions but do enjoy the full benefits.”151 Consider a herdsman attempting to decide how many cattle to place on a common grazing field.152 The herdsman will ask himself, “What is the utility to me of adding one more animal to my herd?” In answering this question, the herdsman will weigh the benefit he receives from an additional cow in terms of increased income against the costs he will incur to buy and maintain the cow. The herdsman’s individual costs, however, will only be a small fraction of the total costs of the cow’s maintenance since the costs of additional overgrazing will be shared by all users of the open field. Since the herdsman enjoys all the benefits of a larger herd but internalizes only some of the costs, the herdsman will graze more cows than is efficient from society’s perspective, and since all herdsmen will employ the same self-interested calculus, the commons will be driven toward overexploitation and, ultimately, tragedy.153 The net returns from the community’s exploitation of the field could be increased if each user of the field grazed fewer cows. Why, then, do the users of the field not reach some agreement to limit the size of their herds? The answer is that in the absence of an effective enforcement mechanism, the users’ promises to graze fewer cows are not credible. While the community as a whole would benefit from the reduced exploitation of the field, each herdsman has an incentive to “cheat,” grazing more than the promised number of cattle in order to maximize his individual profit. The herdsmen are thus trapped in a prisoners’ dilemma.154 As a group, the herdsmen would be better off if they could bind themselves to reduce the sizes of their herds. Since credible commitments cannot be made, however, the herdsmen continue to maintain large herds, resulting in the predictably tragic effect that the field becomes overgrazed. 151 Id. at 454. 152 This illustration is taken directly from Garrett Hardin’s famous article The Tragedy of the Commons. See Hardin, supra note 30, at 1244. 153 See id. 154 See generally Barry Nalebuff, Prisoners’ Dilemma, in 3 THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 89 (Peter Newman ed., 1998) (describing the prisoners’ dilemma and discussing some of its applications). Vol. 1, Issue 1 78 B. Law Firms and the Tragedy of the Commons The tragedy of the commons describes a particularly prevalent form of “externality” involving the overuse of a common-property resource.155 I argue that the structure of partner compensation systems gives rise to this externality in law firms, yielding undesirably high levels of associate attrition. As Marc Galanter and Thomas Palay have noted, a law firm is a mechanism designed to facilitate the sharing of human capital among attorneys.156 Based on their reputation, expertise, and legal skills, partners are often able to attract more legal business than they are able to complete on their own; these partners have a surplus of human capital.157 Young associates, on the other hand, may have a surplus of labor; they may not be able to attract as much legal work as they would like because of their lack of experience and expertise.158 The structure of a law firm allows a partner to “share” her surplus capital with an associate who can use his surplus labor to put the capital to productive use.159 Partners thus rely on associates to “staff” their legal projects and cases. By fulfilling many of the more mundane but essential tasks involved in representing a particular client, associates lessen a partner’s legal workload and allow her to focus more time and energy on developing new clients and business for the firm. If a partner’s income depends at least in part on the amount of new business that the partner generates,160 then the 155 HAL R. VARIAN, INTERMEDIATE MICROECONOMICS: A MODERN APPROACH 622 (6th ed. 2003); see also ROBERT S. PINDYCK & DANIEL L. RUBINFELD, MICROECONOMICS 622 (5th ed. 2001) (defining “externality” as an “[a]ction by either a producer or a consumer which affects other producers or consumers, but is not accounted for in the market price”). 156 See GALANTER & PALAY, supra note 48, at 87-110; see also supra notes 69- 84 and accompanying text. 157 Id. at 91. 158 Id. at 92. 159 Id. at 92-98. 160 A recent survey by Altman Weil Inc. confirms that partner compensation depends heavily on business generation. “When asked to rate the importance of 18 formal compensation factors, law firms placed business origination and personal fees collected in a tie for the top ranking. Client responsibility, case responsibility, client service, legal expertise, and profitability of work were cited in the second tier of importance.” Compensation Plans, PARTNER’S REP. FOR L. FIRM OWNERS, Sept. 2006, at 6. As an article discussing the survey concluded, the survey’s findings demonstrate that “[r]ainmakers still rule the roost.” Id.; see also Harris, supra note 46, at 20,008 (“A rainmaker is a partner who originates business that in many cases is portable, meaning that it will go with the 79 Spring 2008 partner has an incentive to focus her time and effort on cultivating new business for the firm. The partner will thus attempt to generate many new legal projects and will rely to the greatest extent possible on associate labor to complete these projects. This dynamic creates a “tragedy of the commons.” Partners enjoy a disproportionate share of the revenue from the new business they generate, but the costs of staffing and completing these projects are shared equally by all of the partners at the firm. A partner will continue to cultivate new projects until the partner’s marginal benefit from generating an additional project equals the marginal cost to her of managing the project and overseeing its completion. Since the partner enjoys a disproportionate share of the benefits of the new projects she generates but does not internalize a disproportionate share of the projects’ costs, the partner will cultivate more projects than is optimal from the firm’s perspective. Partners thus have an incentive to cultivate an inefficiently high number of new projects. This fact, in turn, leads partners to (1) demand that their firms hire an inefficiently large number of associates to staff their projects, and (2) overwork the associates that the firm does hire. While partners have an incentive to overly exploit associate labor, they have insufficient incentives to take steps that could increase associate retention, such as forming close mentorship relationships with associates or becoming significantly involved in associate training activities. A partner bears the full costs of these individual initiatives while she shares the benefits of increased associate retention with all of the firm’s partners.161 Because of this “tragedy of the commons,” associates are likely to feel overworked and undervalued, and over time, an undesirably large number of associates will likely leave their firms in search of new opportunities. In this way, the compensation and incentive structures of a law firm may contribute to the problem of associate attrition. partner if he leaves for another firm. Partners who are rainmakers often are compensated at high levels to discourage them from leaving the firm.”). 161 The study by Altman Weil suggests that involvement in associate training and mentoring does not factor heavily into the determination of partner compensation. Compensation Plans, supra note 160, at 6. Since most firms’ compensation systems provide partners with inadequate incentives to engage in activities that might increase associate retention, firms can expect partners to engage in a less-than-optimal amount of these retention- bolstering endeavors. Vol. 1, Issue 1 80 i. The Pure Expense-Sharing Firm To see more clearly how partner compensation structures can lead to a “tragedy of the commons,” let’s consider a hypothetical law firm that exists only for the purpose of sharing overhead and other expenses.162 For convenience’s sake, let’s name this pure expense-sharing firm Dewey, Cheatem & Howe. Dewey’s partners receive a share of the firm’s profits equal to the percentage of their contribution to the firm’s gross revenue. In other words, a partner’s yearly income is the difference between the revenue that the partner generated and the partner’s pro rata share of the firm’s annual expenses. Since each partner at Dewey enjoys the full benefit of the revenue she generates but shares costs equally with the firm’s other partners, the situation is ripe for the tragedy of the commons. Unfortunately, the most salient common resource at Dewey is associate labor. A Dewey partner generates revenue by developing client connections and convincing these clients to entrust the partner to handle their legal issues. The more legal projects credited to the partner’s name, the more income the partner makes. Dewey’s partners will thus focus their time and attention on generating new legal projects and will rely to the greatest extent possible on associate labor to “staff” and complete these projects. Since Dewey’s partners enjoy the full benefit of the legal work that associates complete on their behalf while sharing the costs of their exploitation of associate labor with the firm’s other members, they will tend to work Dewey’s associates more intensively than is desirable from the firm’s perspective. Figure 1 demonstrates how this “tragedy of the commons” can arise: 162 See Gilson & Mnookin, supra note 92, at 346-47 (discussing the example of a pure expense-sharing firm). 81 Spring 2008 Figure 1 presents the marginal costs and benefits of exploiting associate labor at Dewey.163 The benefit that the firm receives 163 Although a picture is worth a thousand words, Figure 1 could be a source of confusion rather than illumination if some important components of the graph are not clarified. First, “associate hours worked” refers to the total number of hours associates worked on the projects of a particular partner. Therefore, if a Dewey partner worked with ten associates, and each associate spent 2400 hours working on the partner’s various projects, then the total number of “associate hours worked” would be 24,000. Additionally, I assume in Figure 1 that as the total number of associate hours worked increases, the marginal cost of each associate hour worked increases as well. This assumption seems reasonable, at least at the point where the total number of associate hours worked is already quite high. Since law firms have yet to find a way to increase the total number of hours in a single day, they must occasionally hire more young lawyers if they wish to increase the aggregate number of hours worked by their pool of associates. As the number of associates employed increases, the firm’s costs increase as well. For example, the firm might need to expand the size of its training programs to accompany the additional associates, or it might need to build or lease additional office space so that the new associates will have a place to work. Furthermore, the cost of monitoring associates rises as the firm hires new associates and demands that associates work longer hours. Since it is likely much more costly for a partner to monitor ten associates who spend a total of 24,000 hours working on twenty assignments than it is for a partner to monitor one associate who spends 1600 hours working on one large project, it is not unreasonable to think that the cost of each additional hour of associate labor might increase as the total number of associate hours worked increases. My most important assumption is that an individual partner’s marginal cost curve is a fraction of the firm’s marginal cost curve. Since Dewey’s Vol. 1, Issue 1 82 from an additional hour of associate labor is equal to an associate’s “marginal revenue product,” which measures the additional revenue generated by each additional hour of associate labor.164 In Figure 1, I assume that the marginal revenue product is constant. This assumption seems reasonable given the fact that an associate’s billing rate does not depend on the number of hours that the associate has worked. Like all firms, Dewey maximizes profit by setting the marginal cost of its exploitation of associate labor equal to the marginal revenue product of associate labor.165 As Figure 1 demonstrates, however, a partner’s actual utilization of associate labor is likely to be quite greater than the amount of exploitation that is optimal from the firm’s perspective. This result occurs because the marginal cost a Dewey partner incurs from her exploitation of an additional unit of associate labor is a fraction of the marginal cost borne by the firm. Since a Dewey partner captures all of the additional revenue generated by an extra hour of associate labor but bears only a fraction of the additional costs, the partner is likely to overwork the firm’s associates. In Figure 1, I use the number of hours worked by associates as a proxy for the “intensiveness” of a partner’s exploitation of associate labor. In a pure expense-sharing firm, a partner would not only have an incentive to demand that the firm’s associates devote long hours to her legal projects; the partner also would be discouraged from engaging in personally costly activities that might increase associates’ satisfaction with their jobs and their workplace. For example, a Dewey partner would bear all the costs involved in ensuring that associates were assigned work they found interesting, but the benefits of increased associate satisfaction would be shared by all the firm’s members. partners share such costs as an associate’s salary, overhead, and training expenses, this assumption seems reasonable. Some of the costs of exploiting associate labor cannot be shared, however. For example, a Dewey partner bears the full cost of monitoring the associates who have been assigned to work on her legal projects, and the partner’s marginal monitoring costs are likely to rise as the total number of associate hours worked increases. Nevertheless, since some of the costs of exploiting associate labor are shared by all the firm’s partners, an individual partner’s marginal cost curve will by definition be a fraction of the marginal cost curve of the firm as a whole. 164 See PINDYCK & RUBINFELD, supra note 155, at 502 (defining “marginal revenue product” as the “[a]dditional revenue resulting from the sale of output created by the use of one additional unit of an input”). 165 See id. at 256 (explaining that for all firms, “profit is maximized when marginal revenue is equal to marginal cost”). 83 Spring 2008 Furthermore, partners could not capture all of the benefits of their engagement in training and mentorship activities, but they would bear the full brunt of the costs of these activities. In equilibrium, then, we would expect partners to engage in inefficiently high amounts of exploitative activities that increase the likelihood that associates will depart while indulging in inefficiently low amounts of activities that are likely to boost the firm’s retention of young associates. To see how the tragedy plays out in practice, let’s consider the actions of a Dewey partner who receives a call from a major client at 4:00 p.m. on a Friday. The client asks the partner an important, but not especially pressing, legal question, and the partner of course informs the client that she will respond with an answer as soon as possible. After hanging up the phone, the partner reflects for a moment on the situation. She knows that the legal question will take an associate approximately two days to research and answer. She also knows that the client would like to receive the answer soon but has no particular need for the answer earlier than Wednesday or Thursday of the following week. Nonetheless, the partner would like to impress the client with a prompt response, so she calls an associate and demands that he present her with a memo addressing the issue first thing Monday morning. Since Dewey is a pure expense-sharing firm, the partner reaps all of the benefits of dazzling her client with the quick response, but she shares the costs of the associate’s dissatisfaction over his ruined weekend plans with the firm’s other partners. Over time, seemingly small slights such as this are likely to erode associates’ loyalty to their firms, ultimately yielding inefficiently high rates of attrition. ii. Refining the Model In the analysis above, I assumed that partners enjoy the full benefit of their exploitation of associate labor. In actual practice, however, a firm rarely compensates its partners solely on the basis of their individual contribution to the firm’s gross revenue. Instead, firms tend to base “at least some percentage . . . of a partner’s income on the average productivity of the firm” as a whole.166 Figure 2 takes this factor into account by differentiating between an individual partner’s marginal benefit from the 166 GALANTER & PALAY, supra note 48, at 106. Vol. 1, Issue 1 84 exploitation of associate labor and the marginal benefit of the exploitation to the firm as a whole: As Figure 2 demonstrates, an externality continues to exist as long as the benefits a partner enjoys from exploiting associate labor are disproportionate to the costs that the partner incurs from her exploitative activities. In Figure 2, the partner captures about two-thirds of the additional revenue generated from an extra hour of associate labor, but the partner only incurs about one-seventh of the additional costs. As a result, the partner continues to overexploit associate labor, and the law firm remains trapped in the tragedy of the commons. iii. Explaining the Sick Cycle In the Introduction, I suggested that law firms are caught in a self-defeating cycle. Faced with high attrition rates, law firms are compelled to recruit aggressively to replace their departing associates. To attract top talent in a competitive market for associate labor, law firms offer their entry-level hires large salaries. To pay for these salaries, however, law firms must raise their billable hours expectations, which in turn exacerbates the problem of associate attrition. Why have law firms not found a way to break out of this cycle? My analysis suggests that partner compensation systems perversely discourage partners from taking actions that could 85 Spring 2008 bolster associate retention. A partner who engages in activities capable of improving retention rates, such as associate training and mentoring, bears the full costs of these actions but shares the benefits of increased associate satisfaction with all the firm’s partners. On the other hand, since the costs of associate salaries are shared by every member of the firm, partners are willing to allow their firms to increase entry-level salaries in order to attract new associates to staff their cases. As long as firms continue to reward rainmaking while undercompensating partners for the actions they take to help retain associates, firms will remain trapped in a sick cycle, paying associates ever increasing salaries only to see a high percentage of them depart soon after their start dates. C. Why Have Firms Not Taken More Aggressive Action To Solve the Tragedy? As stated so far, my argument does not account for many of the practical realities of law-firm partnerships. For example, the argument outlined above suggests that all partners focus their time and energy on client generation while leaving the bulk of the substantive legal work on their cases to the associates they supervise. Even for the top rainmakers, this suggestion is an exaggeration of actual practice. All lawyers must perform substantive legal work. The entirety of a legal project—or even the bulk of it—cannot be left in the hands of younger associates. More relevant to my argument, however, is the fact that most partners are not—and do not try to be—rainmakers.167 Robert Nelson has argued that a law firm’s partners can be divided into three strata—“the finders, the minders, and the grinders.”168 The “finders” are a firm’s rainmakers, the partners who bring in new clients and focus on the law firm’s long-term business objectives.169 The “minders” take care of the clients who have already retained the firm’s services and also oversee the firm’s day-to-day administration.170 The “grinders” do the bulk of 167 See Characteristics that Distinguish Successful Law Firms from Marginally Successful Ones, LAW OFFICE MGMT. & ADMIN. REP., Aug. 2007, at 10 (suggesting that “[i]n most law firms, only about 20% of partners, maximum, can successfully generate profitable business”). 168 NELSON, supra note 48, at 69. 169 Id. at 69-73. 170 Id. at 69-70, 73-75. Vol. 1, Issue 1 86 the firm’s substantive legal work.171 Obviously, these distinctions are to a large degree artificial. Every partner in a firm likely “finds,” “minds,” and “grinds,” at least to a certain extent. The distinctions, however, help shed light on the problem of associate attrition. If the “finders” are primarily responsible for the “tragedy of the commons” dynamic discussed above, why do the “minders” and the “grinders” not take action to rein in the exploitative finders? One answer might be that law firms are notorious for their poor management practices. Since law firms have historically “focus[ed] on revenue generation rather than bottom-line profitability,” it is not entirely surprising that these conservative institutions have not acted to stem the tide of associate attrition given the important contribution that associate labor makes to a firm’s gross revenue.172 Why, after all, tinker with a formula that has served most law firms rather well for about a century? Furthermore, since managing partners at law firms generally retain case loads and work as managers part-time, it makes sense that they may be more focused on the short-term goal of attracting new associates by providing higher compensation than on the long-term goal of improving the firm’s associate retention rates.173 Another answer might be that minders and grinders, the individuals who seem to suffer the most from the costly exploitation engaged in by rainmakers, actually contribute to the tragedy of the commons along with their more prestigious brethren. Given a compensation system that rewards revenue generation above all else, minders and grinders have an incentive to do more minding and grinding, and, like finders, they exploit associate labor to help them do more work in the hope that their efforts will be rewarded with fatter paychecks. The most salient explanation for the continued existence of the “tragedy of the commons” dynamic, however, appears to be fear—the fear of less exploitative partners that if they confront their more “productive” cohorts, these rainmakers will leave the firm with their clients in tow.174 Even if a firm could in theory increase its profitability by implementing work-life balance initiatives capable of reducing the firm’s associate attrition rates, the firm may be hesitant to adopt such programs if they would upset the firm’s key rainmakers, who rely on a readily available 171 Id. at 70, 75-77. 172 WILLIAMS & CALVERT, supra note 13, at 4. 173 RIKLEEN, supra note 46, at 233-34, 242. 174 See id. at 329-30. 87 Spring 2008 supply of associate labor to staff the legal projects they bring to the firm.175 As Robert Nelson explains, law firms tend to grant rainmakers a substantial amount of power within the firm because of their control over the firm’s client-base.176 According to Nelson, “[m]any firms now consist of a dual partnership in which lawyers with substantial client responsibility run the firm and take home a major portion of the profits while other lawyers function as little more than salaried staff.” 177 Given the power wielded by rainmakers, it comes as no surprise that partner compensation systems tend to reward the things that rainmakers do best— developing client connections and generating revenue.178 Why should non-rainmakers fear the departure of rainmaking partners, especially given the costs that rainmakers impose on the firm? It appears that non-rainmakers benefit from other partners’ rainmaking in at least two ways. First, in most firms, a rainmaker does not capture all of the revenue she helps generate on the firm’s behalf, so some of this revenue is shared with the non-rainmaking members of the firm. Even more importantly, however, synergies exist in law-firm practice.179 Non-rainmakers may be able to work on some of the rainmakers’ cases or encourage the rainmakers’ clients to provide the non- rainmakers with additional work. Although non-rainmakers would prefer that rainmakers rein in their exploitative activities in order to decrease the costs they impose on the firm as a whole, non-rainmakers may be better off in a firm with exploitative rainmakers than they would be in a firm where all the rainmakers 175 Stephanie Francis Ward, The Ultimate Time-Money Trade-Off, ABA J. E- REP., Feb. 2, 2007, at 2 (discussing the opinions of Susan C. Robinson, associate dean for career services at Stanford Law School, who “suspects that partners, particularly successful ones, would be reluctant to cut associate time requirements” and believes that such an initiative might cause “[r]ainmakers [to] leave for higher profits, taking their clients with them”). 176 NELSON, supra note 48, at 224. 177 Id. at 275. 178 RIKLEEN, supra note 46, at 329-30 (“The fear of many firms . . . that major business producers will leave if not highly rewarded has generally led to compensation systems which favor the firm’s ‘stars.’”); see also S.S. Samuelson, The Organizational Structure of Law Firms: Lessons from Management Theory, 51 OHIO ST. L.J. 645, 666 (1990) (noting that law firms have historically rewarded client generation while ignoring contributions to management even though “[g]ood management can do as much for the bottom line as superior rainmaking”). 179 See, for example, Gilson and Mnookin’s discussion of economies of scope in law firms. Gilson & Mnookin, supra note 92, at 316 n.11, 317. Vol. 1, Issue 1 88 have left to avoid the restrictions imposed on their utilization of associate labor. This insight suggests that the problem of associate attrition cannot be tackled until firms find a way to present a persuasive business case for retention initiatives capable of overcoming the opposition of rainmaking partners. D. Evaluating My Analysis and Understanding Its Limitations I have hypothesized that partner compensation systems that prioritize revenue generation and client cultivation lead to externalities that ultimately result in inefficiently high levels of associate attrition. Unfortunately, the wide-range of compensation systems employed by law firms makes it difficult to test my hypothesis empirically,180 and this difficulty is compounded by law firms’ historical reluctance to publicize the means by which they compensate their partners.181 The available data, however, suggest that the “tragedy of the commons” is a useful theoretical framework for explaining the phenomenon of associate attrition. There is no doubt that partners are requiring their young associates to work long hours. In its study of law-firm practitioners in Massachusetts, the MIT Workplace Center found that 47% of female associates worked fifty-one or more hours per week, and 78% of male associates did so.182 Furthermore, about one-quarter of male and female associates worked more than sixty hours per week.183 Furthermore, my analysis of partner incentives suggests that partners are likely to give associates routine assignments that do not necessarily comport with the associates’ practice interests. We are likely to see this result for two reasons. First, it is costly for partners to investigate their associates’ practice interests, and it is even more costly for them to manage their associates’ workloads so that the associates work mainly in their fields of 180 See Characteristics that Distinguish Successful Law Firms from Marginally Successful Ones, supra note 167, at 10 (“[O]nly three Am Law 100 firms continue to use [compensation] formulas . . . , about 12 use a pure lockstep system, and the remaining firms use subjective systems.”); RIKLEEN, supra note 46, at 92 (noting that there are “nearly as many compensation systems as there are law firms, each with their own nuances”). 181 See supra note 33 and accompanying text. 182 HARRINGTON & HSI, supra note 26, at 15; see also supra note 147. 183 Id. 89 Spring 2008 interest. Since partners are not rewarded for bearing these costs, they will likely pay insufficient attention to associates’ satisfaction with the quality of their work. Furthermore, partners can minimize the amount of time and effort they spend on supervision by assigning associates relatively routine tasks that associates can complete with minimal guidance from their supervising attorney. As a result, my analysis in this Article is supported by studies showing that partners tend to delegate “specialized and mundane tasks” to associates.184 The After the JD study found that law-firm associates generally spend 50% or more of their time working in one practice area,185 and the study also found that lawyers in private practice tend to experience relatively low levels of “trust” and “independence” in their work, with strikingly low levels in the largest law firms.186 These large-firm attorneys also reported spending large amounts of time on “routine” tasks, such as basic legal research and due diligence.187 This surfeit of mundane and routine work is a product of the tragedy of the commons. Also providing some support for my central hypothesis is the fact that the recent move toward more productivity-based compensation systems has gone hand-in-hand with increased concern about the problem of associate attrition.188 While this apparent correlation certainly does not prove causation, it at least does not tend to show that the adoption of compensation systems that prioritize revenue generation mitigates the problem of associate attrition. III. Potential Solutions A. Moving to a Lockstep or “Income Sharing” Model Based on my analysis of productivity-based compensation systems, one might expect associate retention rates to be higher in 184 NELSON, supra note 48, at 184. 185 AFTER THE JD, supra note 9, at 37. 186 Id. at 34. 187 Id. 188 Samuelson & Jaffe, supra note 93, at 195-96 (noting that productivity- based compensation systems now appear to be more common than lockstep models); see Compensation Plans, supra note 160, at 6; see also Gilson & Mnookin, supra note 92, at 319, 340 (discussing the growing consensus among academics and consultants that productivity-based compensation models are superior to lockstep models in which partners are compensated based solely on their seniority). Vol. 1, Issue 1 90 firms where partners share profits evenly or use a “lockstep” system in which partners are compensated solely based on their seniority. In such firms, partners would maximize their individual payout by maximizing the firm’s profits. Therefore, they would not have an individual incentive to exploit associate labor beyond the point where the marginal benefit of an additional unit of labor equaled the marginal cost to the firm of that unit of labor. In this way, a lockstep or sharing model may help a firm avoid the perverse incentives of a compensation system that focuses mainly on revenue generation.189 There is reason to doubt, however, that associates in “sharing” or “lockstep” firms would work fewer hours and would be treated more humanely than associates in firms where partner compensation is tied to business generation. When compensation does not depend on performance, firms face the threat of “shirking.” In other words, partners may work just hard enough to maintain their status as partners rather than actively seeking out new business opportunities for the firm. “Sharing” or “lockstep” firms may thus attempt to weed out “shirkers” by providing their associates with highly demanding workloads and then promoting only those associates who show that they are “driven” to perform, regardless of monetary compensation. In other words, seemingly high attrition rates may be a necessary attribute of “sharing” or “lockstep” firms. To avoid the problem of shirking among its partners, the firm must promote only a select number of associates who have shown that they are highly unlikely to shirk.190 B. Making Associate Retention a Factor in Partner Compensation Decisions Even if firms cannot reduce their attrition rates by moving to a sharing or lockstep model, they can mitigate the perverse incentives that lead to the tragedy of the commons by tinkering with their compensation metrics. As Lauren Rikleen notes: The internal life of lawyers within a law firm can be summarized in three simple words: compensation drives behavior. If you want to understand the 189 See Gilson & Mnookin, supra note 92, at 352. Gilson and Mnookin also endorse the sharing model as a means of risk diversification. See id. at 321- 53. 190 See id. at 351-80. 91 Spring 2008 firm’s culture, then look first at the way in which partner profits are distributed. Knowledge of a particular firm’s compensation system provides the key to understanding the behaviors and interpersonal relationships that are likely to exist among the firm’s attorneys.191 If Rikleen is right, then firms can improve their retention rates by implementing simple changes in their partner compensation systems. For example, firms could institute “a mutual evaluation process which allows junior attorneys to evaluate their superiors,” and the results of these “360” or “bottom-up” evaluations could be taken into account in the firm’s compensation decisions.192 Furthermore, law firms could set retention goals for particular departments or practice areas and then hold the partners in those fields responsible for ensuring that the retention goals are met.193 Similarly, if an unusually high percentage of associates who work closely with a particular partner ultimately decide to leave the firm, the firm could penalize the partner by decreasing her annual share of the firm’s profits. All of these steps are simple means of “internalizing” the externality produced by compensation systems that prioritize revenue generation and ignore the costs that partners impose on their firms through their overexploitation of associate labor. In this sense, the suggestions listed above are similar to the Pigouvian taxes often used by government regulators to deal with such classic externalities as air and water pollution.194 By forcing partners to bear at least some of the costs of associate attrition, the suggested strategies discourage partners from overly exploiting associate labor. If partners are forced to bear too high a share of the costs they impose on the firm through their exploitation of associate labor, it is theoretically possible that a new form of externality may arise. As Figure 3 shows, partners may underexploit associate labor if they are forced to bear all of the costs of this exploitation but enjoy only a fraction of the benefits: 191 RIKLEEN, supra note 46, at 91. 192 Id. at 305. 193 Id. at 306. 194 VARIAN, supra note 155, at 613-14. Vol. 1, Issue 1 92 Although law-firm managers should be cognizant of this potential issue, the probability that such a problem will arise seems so remote that it should not deter law firms from taking decisive action to ameliorate the perverse incentives created by their current compensation systems. As explained above, law firms that implement retention- bolstering initiatives risk provoking the ire of their rainmaking partners. Firm managers, however, should think critically about the costs of the rainmakers’ exploitative activities, and they should forcefully present the business case for reforms that have the potential of reducing the firm’s costs and thus increasing its profitability. To make this case, firms will need to improve their tracking of attrition-related data, and most importantly, they will need to carefully calculate the costs that associate attrition imposes on the firm. Furthermore, firm managers should remind recalcitrant partners that it is inconvenient for clients when the roster of attorneys working on their cases keeps changing.195 In fact, Rikleen suggests that the most successful arguments in favor of retention measures will focus on improving client services, not on maximizing the firm’s profit margin.196 Since all attorneys— and rainmakers in particular—are deeply interested in keeping their clients satisfied, partners may be more willing to support changes that they believe will allow them to better serve their clients. 195 RIKLEEN, supra note 46, at 341. 196 Id. at 386. 93 Spring 2008 Given the level of power that rainmakers wield, however, it will be difficult for change in law firms to come entirely from within. Without pressure from outside forces, it appears that law firms will cleave to the status quo, and associate attrition rates will continue their steady and ineluctable ascent. Given law firms’ high demand for top legal talent, young attorneys seeking jobs have considerable leverage to shape the way that the nation’s leading firms practice law. If interviewees regularly demand information about law firms’ attrition rates, law firms will get the message that associate retention is an important issue for young lawyers in choosing a firm, and competitive pressures will lead firms to implement policies to decrease their attrition rates. Even more importantly, law-firm “watchdogs” such as Vault,197 American Lawyer, and NALP198 should ask firms to disclose their attrition statistics. By offering to publish firms’ attrition data, these watchdogs could initiate a process of “information unraveling” that would lead most firms to disclose their attrition rates.199 The firms with the best retention statistics would disclose their data to the watchdogs as a means of attracting more lawyers to their firms. Firms with average attrition statistics would then feel compelled to disclose their data in order to counteract possible speculation that they were not disclosing their statistics because their attrition rates were even worse than average. At this point, the firms with above average attrition rates would be essentially indifferent between disclosing and not disclosing. If they did not disclose, job seekers would simply assume that the firms’ attrition statistics were worse than 197 See BRIAN DALTON ET AL., VAULT GUIDE TO THE TOP 100 LAW FIRMS (8th ed. 2006). 198 See NALP Directory of Legal Employers, http://www.nalpdirectory.com (last visited Mar.30, 2008). 199 For a more formal treatment of the phenomenon of “information unraveling,” see Robert H. Gertner, Disclosure and Unravelling, in 1 THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW, supra note 154, at 605. Admittedly, law firms with stellar attrition rates could initiate this process of information unraveling without the help of the law-firm watchdogs. For example, these firms could publish their retention rates in the informational materials they provide to job applicants. Since attrition is not currently a topic at the forefront of most job seekers’ minds, however, it seems unlikely that firms will voluntarily publish their attrition data without some goading from organizations such as Vault and American Lawyer. Furthermore, exposés on associate attrition would certainly be a welcome change from the legal media’s usual preoccupation with the size of associate salaries and bonuses. Vol. 1, Issue 1 94 the statistics of the firms that had disclosed. By disclosing, the firms could at least clarify what their real attrition rates were instead of leaving job applicants to speculate about the matter. By initiating this process of information unraveling, law- firm watchdogs could push firms to implement retention- bolstering strategies in order to avoid the negative reputational effects of high attrition rates. Furthermore, this outside pressure might empower firm managers by allowing them to argue that high attrition rates negatively affect a firm’s ability to attract top legal talent. Since rainmakers rely heavily on the labor of young associates, they might be concerned about the possibility of a drop in the firm’s intake of new associates and may therefore accede to measures designed to decrease associate attrition. CONCLUSION Associate attrition challenges traditional assumptions about the structure and economics of law-firm practice. Contrary to the tradition in which law students chose one law firm after graduation and worked diligently toward the goal of making partner with that firm, modern associates generally have little expectation that they will make partner at their current firms. In a survey of associates in Texas law firms, Susan Fortney found that only 8% of respondents identified “full partnership participation” as the professional goal they were most interested in attaining.200 Similarly, American Lawyer found in its most recent nationwide survey of midlevel associates that only 11.7% of respondents expected that they would become equity partners at their current firm.201 If, however, associates do not expect to make partner and are not particularly interested in doing so, then it becomes necessary to revisit Galanter and Palay’s canonical conception of the law firm as a form of “promotion-to-partner tournament.” According to Galanter and Palay, firms use the carrot of a potential partnership share to discourage shirking and incentivize hard work by associates. But if many associates have no particular desire to make partner, then something other than the prospect of partnership must be leading them to join firms and then work hard once there. The factors that draw today’s young attorneys to 200 Susan Saab Fortney, An Empirical Study of Associate Satisfaction, Law Firm Culture, and the Effects of Billable Hour Requirements (pt. 1), 64 TEX. BAR J. 1060, 1062 (2001). 201 Press, supra note 7, at 91. 95 Spring 2008 law firms likely include: a desire for high compensation and benefits; the need to pay off law-school debt; the pursuit of high- quality training; the ease of obtaining a law-firm job through institutionalized on-campus interviewing programs; the desire to work on high-profile cases and do “sophisticated” legal work; and the students’ perceived lack of better options. Furthermore, a number of factors might lead young associates to devote a great deal of effort to their jobs even though they do not expect to make partner. These factors include: the desire to build and maintain a reputation as a hard worker in order to ease future job searches; the associate’s internal motivation and drive; the fear of being fired; the desire for year-end bonuses; and the feeling that hard work will increase the associate’s chances of working on high- profile cases with leading partners. These factors, however, may not be sufficient to secure the level of commitment desired by a firm’s rainmaking partners. As Lauren Rikleen notes, the so-called “generation gap” bemoaned by popular commentators may not be the result of “an altered work ethic”; instead, the generational difference may be viewed “as the logical result of recognizing that the opportunities for partnership are small and, therefore, [associates’] relationship with their law firm employers will be of diminished duration.”202 Put simply, young associates may understandably be unwilling to sacrifice their personal and familial lives for a firm with which they expect to be affiliated for only a few years. As the joke with which I began this Article demonstrates,203 associate-partner relations are a topic of increasing comment, controversy, and even mirth. Associate attrition, however, is no laughing matter. It robs firms of millions of dollars of profit each year. In this Article, I have argued that partner compensation systems that prioritize revenue generation ultimately lead to a tragedy of the commons in which associate labor is overly exploited, yielding inefficiently high rates of associate attrition. Firms can break out of the attrition cycle by restructuring the way in which they compensate their partners. To tackle the problem of associate attrition, however, firm managers will have to show an increased willingness to confront exploitative partners; ultimately, managers must find a way to convince a firm’s rainmakers that they can in fact live without another Picasso. 202 RIKLEEN, supra note 46, at 274. 203 See supra note 1 and accompanying text.
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