Continue reading »]]> Bryan Caplan is linking to a new study that covers an oft-discussed, but poorly researched, area of professional services firm management: the actual hiring process at elite firms in law, finance, and consulting.  (The actual paper by Lauren Rivera, ”Ivies, Extracurriculars, and Exclusion“, Research in Social Stratification and Mobility 2011, is behind a paywall).

Bryan outlines the five key highlights:

1. Most applications practically go straight in the trash
2. Evaluators have a lot of slack
3. Super-elite credentials matter much more than your academic record
4. Super-elite schools matter because they’re strong schools, not because they’re better at building human capital
5. Extra-curriculars matter

Ask anyone at a major firm in finance, law, and consulting, and you’ll here about the dedication that every professional has to the hiring process, that because talent is the cornerstone of any successful firm, everyone up to the partner level is heavily involved in recruiting and selection.  You’ll hear paeans to diversity in the firm, not just in terms of race or ethnicity, but also backgrounds and interests.

The truth, as Rivera reveals, is more mixed.  Professionals at all levels are indeed involved in hiring, but they’re also busy with client work, and resume reviews are quick skims. And despite practicing professions dedicated to rationality, they’re still humans who suffer from the same hiring biases as any other manager.  While they talk about diversity at recruitment events, they look for signals of people who are just like them, especially when it comes to attending an Ivy League university, which anyone who has tried to break into a top-tier firm from a school off the standard recruiting schedule can tell you.

As Megan McCardle points out, this isn’t just bad for society, it’s terrible for the firms:

Forget about the effects on society, though; this is terrible for organizations.  You see this in Washington all the time–a friend who went to a lesser-known state school said he could always tell the people he wasn’t going to like when he met them at cocktail parties, because the minute he told them where he’d gone to school, they became extremely interested in going to get another drink or find the cheese dip.  This is one of the smartest, most consistently interesting and original, most talented writers I know.  Having actually attended one of those elite schools that apparently make you fascinating, I can attest firsthand that statistically, the elitists were vanishingly unlikely to be as interesting as the person they abandoned because he’d gone to a state college.

 

The Ivy League is full of smart, interesting people.  But it is not full of all of the smart, interesting people in the country, or even a majority of them.  And given the resumes required to get there, it produces a group of people who are narrow in certain predictible ways.  (I include myself in this: just because I can see it operating doesn’t mean I can escape it.)

The problem is that actually seeking out a wide variety of graduates would be much more expensive and time consuming.  Why spend the effort searching for “best” when you can easily access “very, very good”?

 

It’s not actually a great personal tragedy to be turned down by McKinsey (she said, from personal experience); there are still a lot of interesting and remunerative jobs out there.

But it may well be a corporate tragedy for McKinsey and its clients.

The homogenization of top-tier professional firms might not be as bad as Megan makes it sound.  At their core, these firms are looking for people who are willing to work extremely long hours, with intense focus, on work that might be analytically demanding, but isn’t usually that interesting.  Not coincidentally, that’s what elite universities usually screen for too, so university admissions serve as a useful shorthand.  It’s also why many of these firms are finding new sources of talent in burnt out PhD students – what better way to prove that you’re willing to work really hard at something you don’t enjoy than spending five years on a degree you don’t even want?

Rivera’s finding about extra-curriculars, while it surprises Bryan, lines up fairly well with how I’ve heard professionals describe “diversity” in their firm.  If you listen closely, diversity falls into one of two categories.  First, there’s diversity-of-academic-background, which means that there are people running around who went to the same elite institutions, but got a degree in something other than business or economics.  The second is diversity-of-outside-interest, and usually involves the anecdote about the partner who’s in an improv group, or the managing director who likes to build custom motorcycles.

These people are interesting in the sense that they’ve shown a fanatical devotion to at least one thing outside their core practice, but I’m not sure if it’s what I’d rely on to bring intellectual diversity to my firm.  And it’s intellectual diversity that leads to better outcomes for clients, as  Scott Page discusses in his book The Difference (I wish I could quote from it, but my copy is in storage in Detroit).

In contrast, I’ve seen a number of companies, both professional and corporate, that practiced what I call”talent arbitrage,” recruiting the best and brightest from top-tier state universities that fly under the radar of the usual hiring elite .  GE used to be well known for this practice, but I’ve also seen it more recently in rapidly growing software companies, profitable legacy manufacturers, and highly successful specialist consultancies.  It takes a much more sophisticated human resources function and dedication to talent management than most companies employ, but it’s also a way to hire great people without having to offer the astronomical salaries now needed to recruit from the Ivy League.

Continue reading »]]> The Wall Street Journal reports that the spread between the highest paid partners and their peers at top law firms is growing:

Now some top rainmaker partners at firms in New York, Los Angeles, Washington and Chicago earn $10 million or more a year, compared with $640,000 for the average partner at a U.S. firm, said Jeffrey Lowe, a managing partner at the legal recruiting firm Major, Lindsey & Africa.

Traditional notions of pay equity are falling by the wayside at firms eager to hire and retain proven business generators, whatever their cost, particularly at a time when many companies are reducing spending on outside lawyers. Faced with declining revenues, firms want big-name lawyers who perform mission-critical work and whose billing rates are more resistant to economic downturns.

Rather than a new phenomenon, it’s more likely that this is the continuation of a broader trend.  David Maister identified it in 2006, when he updated his original essay about the One Firm Culture, noting that even the most egalitarian, insular firms are increasing their use of both lateral hires and differentiated compensation:

The one-firm firms have largely avoided the stampede toward individual-based (or profit-center-based) reward schemes. However, since 1985 most one-firm firms have gradually expanded the individual component of their reward scheme (in fact if not in rhetoric) and have increased the total compensation ratio between the highest-paid members and the lowest-paid members.

At Latham, until 1993 the long-term compensation element (known as units) was essentially lockstep, with seniority as the main driver. Under cover of the early 1990s recession, this system was changed. Management’s considered view was that the firm could not operate successfully in the emerging marketplace without providing more incentive for short- and long-term individual performance, particularly on the business development front.

The highest paid partners, based on the WSJ analysis, tend to work at smaller firms – only Skadden cracked the list of both the ten largest firms and the ten with the highest average-partner compensation, where it was #10 and the only firm with more than 200 partners.

Many of the highest paid lawyers in these firms specialize in complex business transactions: high stakes, once-in-a-lifetime deals where incremental experience can add massive value to clients.  As Megan Mcardle put it in an explanation last year of Goldman Sachs’ high fees, “when you have only one chance to get it right, you tend to open up your wallet and pray. So one-shot deals are very, very expensive—a logic that prevails with weddings, funerals, and college diplomas.”  Wachtell, the firm with the highest paid partners in the Journal’s analysis, specializes in mergers and acquisitions, and as the article points out towards the end, banks and hedge funds are now competing for the same talent, driving up compensation relative to other practice areas. 

It will be interesting to see how law firms manage increasing inequality between partners in different practice areas.