Actually, this post is less about hockey players and associates
than it is about how the top firms are all able to mysteriously agree
on the "going rate" ($125,000 for first year’s) without colluding,
and on the dynamics behind the scenes when that rate abruptly jump-shifts
to a new equilibrium.
The wonderful Robert Frank has the
hockey-player story. (Frank has been a professor of economics
at Cornell since 1972, and co-authored Principles of Microeconomics with
our Fed Chief heir apparent, Ben Bernanke; if you ever see
his byline, you owe it to yourself to read at least the first paragraph
and see if he doesn’t draw you in.)
Frank recounts the hockey-player mystery as analyzed by
Thomas Schelling, just-announced Nobel Prize winner. In 1978,
Schelling asked why, since all hockey players left to their own devices
will prefer to play without a helmet,
in secret ballots they nevertheless vote strongly in favor of mandatory
helmets. In
other words, if the rule is such a great idea, why don’t the players
just don the helmets on their own?
The answer takes us into territory where the Invisible
Hand breaks down. Any individual (rational, utility-maximizing)
player believes he can play marginally better without a helmet—seeing
and hearing more acutely. The IH would therefore posit that all
aggressive players would discard their helmets for the perceived
competitive advantage: A slightly higher chance of winning is
valued more than the increased safety a helmet provides. But of
course, once no one is wearing a helmet, no one has a relative advantage
in the game—and
all that has been accomplished is to raise the risk level for all. Thus
secret ballots mandate helmets.
Similar "beyond the Invisible Hand" logic applies when
it comes to associates’ workloads. If everyone else is leaving
the office at 5:00 (i.e., wearing helmets), I can stand out from
the crowd by working ’til 8:00. Once everyone is working ’til
8:00 (doffing their helmets), my competitive advantage disappears
and the only result is 2,200 hours/year minimum for all. As Frank
says pithily, "The invisible hand assumes that reward depends only
on absolute performance. The fact is that life is graded on the curve."
Now turn to the flip-side of associate hours: The
"going rate." Legal Week is covering the
possible eruption of a salary war in the UK (more precisely, a one-time
salary spike), where Allen & Overy recently fired a salvo by hiking
starting salaries, and all are holding their collective breath to
see whether others will follow suit.
"Haven’t we been here before?!" you are asking: Indeed
we have; the profitability of many US firms took a lasting hit after
the dot-com-driven spike from $100,000 for $125,000 in 2000. So
this time around, we know better, right? Maybe not. This
is the dilemma:
- Law firms have very few controllable (variable) costs.
- Of their fixed costs, compensation is far and away the largest
piece of the pie; real estate is next, and essentially everything
else is immaterial. - But the war for talent is one that, on pain of resigning the
firm to second-rate status, simply must be won at any cost. - When associates are in short supply, as they evidently are
now in the UK, guess who gains the upper hand at the imaginary
bargaining table?
A brief digression on "in short supply:" In a tautological
way, demand and supply are always equal, in the sense that
the number of associates who start at City firms (supply) is identical
to the number who are hired (demand). Observations about "tight"
or "short" supply refer not to this static arithmetic truism but
to the underlying changes in the marketplace: Here, the fact that
corporate, M&A, private equity, and funds work are all ramping up
and four years ago in the downturn many UK associates were shown
the door.
So is there any alternative but for City firms to follow A&O’s lead? Isn’t
the inevitable handwriting on the wall?
I invite you to participate in the following thought experiment: Permit
yourself to ask if there might not be something other than $$ (or ££ or €€)
to entice associates to come, and then to stay, at your firm? After
all, in the Maslow hierarchy,
money can satisfy physiological and safety needs, but not belonging,
esteem, or self-actualization needs.
Realistically, any City (or AmLaw 200) lawyer expects to work hard
and concomitantly to be paid well. But how many hold out
any prayer, much less expectation, of enjoying a feeling of belonging,
of, dare we say, loyalty to their firm? (We’re discussing associates,
but experience with lateral partner moves confirms the indisputable
value loyalty has in the marketplace: No partner will move for,
say, a 10% bump-up, in a stratosphere where 10% could be real money.
Loyalty is the counterweight.)
Absent any sense of belonging, we have highly paid but miserable people;
with a sense of belonging, we might aspire to well-paid but happy
people. This would require a firm and consistent commitment to
recruiting people not just with the right technical skills but those
with the right cultural and behavioral profiles. (Or, to paraphrase Legal
Week, we would need to break the syndrome of "hire for the technical,
fire for the behavioral.") I stress "consistent:" Creating
a:
- palpable,
- meaningful,
- credible
firm identity that differentiates you from your peers takes both vision
and hard work.
The good news is that, when the tough times return, as they
will, you will have a reputation (a marketplace asset every bit
as real as its counterpart, loyalty) that will enable you to stand
apart from the firms whose recruitment and retention policy amounts
to "pay them now, shoot them later."
And you don’t have to get partners in all the City firms
to agree to this by secret ballot; you can do it starting in your
executive committee. Then you will be playing hockey without a
helmet while all around you are encumbered with their gear.
