Sharing among the Human Capitalists: An Economic Inquiry into the Corporate Law Firm and How Partners Split Profits

Abstract

Large corporate law firms seem to be in a state of extraordinary flux. Success and failure are both on the rise. Large firms appear to supply a substantial and growing proportion of the legal services consumed by American business enterprises' and to hire a significant fraction of the graduating classes of elite

Changing career models and capacity for innovation in professional services

“…The up-or-out model is a form of tournament promotion system (Galanter & Palay, 1991;Gilson & Mnookin, 1985;Kordana, 1995;Landers et al, 1996;Lazear & Rosen, 1981;Wilkins & Gulati, 1998). Candidates compete against each other for promotion to a limited number of positions at the next grade, and promotion is based on relative ranking rather than any individual's absolute merits.…”

“…The promotion to partner decision has obviously desirable consequences for the candidate, but also important ramifications for the firm's reputation, ability to generate future profits, and number of co-owners who will share the total profits of the firm (Hitt et al, 2001). While the inevitable waste of good-quality professionals in whom the firm has invested substantial sums and who are likely to be highly productive makes this model seem a costly device to select a partner, its incentive and signaling properties explain its utility (Gilson & Mnookin, 1985, 1989. For the firm, the up-or-out system resolves the problem of incentivizing employees in a production process where effort is difficult to measure and the relationship between employee input (work effort) and output is complex.…”

Strategizing, economizing, and economic organization

“…Thus Gilson and Mnookin (1985) examine compensation practices in law firms-the leading payment alternatives being equal shares to senior partners vs. a marginal productivity payment scheme-and advance a rationale in which differential transaction-specific values (between clients, lawyers, and law firms) figure prominently. Cereris paribus, sharing arrangements among partners are favored, which is to say that high-powered incentives are disfavored, as the relation between clients and law firms deepens.…”

Governance of professional service firms: a configurational approach

“…Hypothesis 2.2: The greater the degree of service diversification, the more decentralized a PSF's organization structure will be, in particular if it is highly specialized, ceteris paribus Amburgey and Dacin (1994); Rumelt (1974); Williamson (1975) Effects on decion-making Hypothesis 2.3: The greater the degree of service diversification, the more hierarchical will be the distribution of control rights, especially at the firm level or similarly comprehensive organizational units, ceteris paribus Amburgey and Dacin (1994);Brock et al (1999a); Greenwood and Empson (2003); Malhotra et al (2006); Rose and Hinings (1999) Effects on remuneration system Hypothesis 2.4: The greater the degree of service diversification, the less likely a PSF is to use a lockstep remuneration system, ceteris paribus Koza and Lewin (1999);Nelson (1988);Sherer (2007) Counter position: Gilson and Mnookin (1985) Alchian and Demsetz (1972); Gilson and Mnookin (1985) Business Research (2014) 7:125-160 135 services, most steps necessary for service provision can be well determined in advance and, because of their standardized, routine nature, can also be easily monitored. A scorecard remuneration system that relies on detailed measures of individual behavior should more likely be implemented in such PSFs than in firms that deliver highly customized services, in which a lockstep system may be the only feasible remuneration system if service provision requires strong team production (also see Alchian and Demsetz 1972).…”

“…Also, a strong culture like a clan lacks ''[…] the explicit rules of the bureaucracy'' (Ouchi 1979, 838) and, therefore, uses a set of homogeneous values and beliefs as a substitute for formal and bureaucratic modes of control (Mintzberg 1983;Ouchi 1980). In addition, Gilson and Mnookin's (1985) study on law firm remuneration systems suggests that increasing heterogeneity of values and beliefs makes it more likely that firms will use eat-what-you-kill or scorecard instead of lockstep remuneration. Second, we suggest that the nature of the firm culture affects organizational governance.…”