Via Tyler Cowen at Marginal Revolution:

Our argument can be briefly summarized: Attorneys are “knowledge workers,” who differ from other employees because they essentially carry around key firm assets in their brains. The knowledge assets these lawyers control—an understanding of the needs and interests of clients—are obviously of greatest value when used with specific clients. This specificity gives individual attorneys considerable leverage over their employers. By threatening to “grab and leave” with an important client, attorneys can leverage an increased share of their firm’s revenues. The up-or-out partnership system found in large law firms has evolved over time as a workable resolution to this particular problem. By forming partnerships and firing experienced attorneys who are not promoted to partnership positions, law firms limit the opportunity for experienced attorneys to grab and leave with the firm’s valuable clients. Grabbing and leaving is more important in legal partnerships than in conventional firms because law firms cannot readily establish property rights over the knowledge essential for serving particular clients.

He also has a different exerpt.

The argument applies to most professional services firms, like large management consulting firms. In these types of firms, partners handle client relationships - especially sales - while the actual work is left to the lower level associates. Partnership is the carrot at the end of the stick as well as a method for keeping experienced and talented associates from breaking out on their own. The up-or-out model keeps the number of partners small, their quality high, and incentivises low level associates.

Organizations in knowledge industries need to realize how fluid their customer relationships are, and how important it is to manage those relationships. Dworin Consulting helps firms and non-profits identify their stakeholders’ needs and develop customized strategies for engaging them. In addition, Dworin Consulting helps organizations design incentive schemes, like up-and-out promotion, to align employee motivations with group goals.

For those interested in the full paper, it’s available here, or here.

Categories: Careers, Incentive Centered Design, Information Asymmetries, Information Economics, Law, Matching Mechanisms