In Legal Sex Tournaments, Stephen Bainbridge explains how law firms promote their lawyers to partners and why so few women make it to the top:
The path to partnership in large firms can be understood as a promotion tournament. Many service firms use such tournaments as a mechanism for reducing agency costs through ‘comparative performance evaluation.’ In a promotion tournament, the principal ranks its agents by their performance relative to one another. The best performing agents are promoted to positions with higher pay and/or status. In law firms, associates are ranked and the best performers are promoted to partner at the end of an evaluation period.For law firms, the promotion-to-partner tournament solves two agency cost problems at a single stroke. On the one hand, the firm makes investments in its associates’ human capital — i.e., skills and client relationships — during their apprenticeship. The firm will want to discourage associates from leaving the firm before it has fully amortized those investments. On the other hand, the firm must also deter shirking by associates.
The firm gives associates incentive both to remain for the optimal period and to maximize their productivity during that period by holding ‘a tournament in which all the associates in a particular entering class compete and the firm awards the prize of partnership to the top alpha (?) percent of the contestants.’ The prize of promotion to a more secure and higher status position, plus the accompanying increase in compensation, gives lawyers an incentive to remain at the firm.
Conversely, the threat of losing the tournament deters shirking. A lawyer who fails to win the tournament loses more than just the opportunity for future wealth and status gains. Lawyers make substantial investments in client-specific human capital by developing relationships with the client and familiarizing themselves with the client’s business. Because the investment is specific to the particular client, it will be lost if the relationship ends. Hence, the lawyer has a strong incentive to maintain that relationship.
Tournaments are highly risky. Only a small percentage of entering first year associates survive the winnowing process. Even among those who make it through the probationary period to the final promotion decision, a significant number are often denied partnership.
Tournaments are highly risky, and women are more risk-averse than men.