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Determinants of Firm Internal Labor Markets in Large Law Firms Author(s): Douglas R. Wholey Source: Administrative Science Quarterly, Vol. 30, No. 3 (Sep., 1985), pp. 318-335 Published by: Sage Publications, Inc. on behalf of the Johnson Graduate School of Management, Cornell University Stable URL: http://www.jstor.org/stable/2392665 . Accessed: 12/06/2014 15:17 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. . Sage Publications, Inc. and Johnson Graduate School of Management, Cornell University are collaborating with JSTOR to digitize, preserve and extend access to Administrative Science Quarterly. http://www.jstor.org This content downloaded from 62.122.79.90 on Thu, 12 Jun 2014 15:17:44 PM All use subject to JSTOR Terms and Conditions

Determinants of Firm Internal Labor Markets in Large Law Firms

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Page 1: Determinants of Firm Internal Labor Markets in Large Law Firms

Determinants of Firm Internal Labor Markets in Large Law FirmsAuthor(s): Douglas R. WholeySource: Administrative Science Quarterly, Vol. 30, No. 3 (Sep., 1985), pp. 318-335Published by: Sage Publications, Inc. on behalf of the Johnson Graduate School of Management,Cornell UniversityStable URL: http://www.jstor.org/stable/2392665 .

Accessed: 12/06/2014 15:17

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

Sage Publications, Inc. and Johnson Graduate School of Management, Cornell University are collaboratingwith JSTOR to digitize, preserve and extend access to Administrative Science Quarterly.

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Page 2: Determinants of Firm Internal Labor Markets in Large Law Firms

Determinants of Firm Internal Labor Markets in Large Law Firms

Douglas R. Wholey

Professional labor markets, such as law, are often thought to be highly open occupational internal labor markets, in which promotion is rare and lateral entry is common. In the law firms analyzed in this study, however, promotion was much more common than lateral entry: three out of four partnership positions in law firms were staffed through promotion rather than lateral entry. Law firm growth, the number of major clients, and addition of major clients increased promotion, while promotions in prior periods decreased current promotion. Addition of major clients and promotions in prior periods led to lateral entry.

Interest in how organizations pattern mobility of individuals has been increasing as researchers realize the importance of orga- nizational processes in explaining individual status inequality (Baron and Bielby, 1980; Baron, 1984). Much of the literature analyzing organizational influences on mobility has addressed determinants of promotion, assessing -both individual and orga- nizational factors. This literature has neglected two different staffing processes that have implications for internal labor markets (ILMs) and individuals in those labor markets: the staffing of senior positions by recruiting internally, through promotion, or externally, through lateral entry.

Internal labor markets are characterized by job ladders, entry from the external labor market into entry ports, and movement of individuals up these ladders through promotion (Doeringer and Piore, 1971; Althauser and Kalleberg, 1981). A major dimension of an ILM is openness, the degree to which the ILM is open to the external labor market (Doeringer and Piore, 1971). Where individuals can enter into any position, making all positions entry ports, the ILM is fully open. Where individuals are hired into one entry port and senior positions are staffed by promoting personnel from that position, the ILM is fully closed. The ease of lateral entry relative to promotion is inversely related to the openness of the ILM. Being fully closed or fully open are the extremes of a continuum, with most organiza- tions falling in between.

ILM openness affects individuals, organizations, and labor market structure. The degree of openness delimits who is eligible and competing for a position. The more open the ILMs in a labor market, the larger the pool of competitors for a position. Openness also leads to an increase in the amount of information available about jobs outside the firm. This informa- tion is brought in by the lateral entrants, who move into senior positions laterally, and might prove useful to employees in seeking new jobs outside the organization. Openness can be beneficial to the organization, as it provides a mechanism for infusing new ideas into organizations.

Closed ILMs with promotion through job ladders are used by organizations to motivate, evaluate, and train employees over extended periods. Because employees regard their careers as being within a firm, employee goals are more likely to be associated with organizational goals, thereby improving organi- zational performance.

ILMs have typically been divided by degree of openness into two polar types: firm ILMs and occupational ILMs (Doeringer

318/Administrative Science Quarterly, 30 (1985): 318-335

(? 1985 by Cornell University. 0001 -8392/85/3003-031 8/$1 .00.

I wish to thank John Freeman, George Strauss, Yinon Cohen, Vernon Greene, Gerrit Wolf, Rob Rosen, Robert Althauser, Jim Baron, and the associate editor at ASQ for their helpful comments on earlier drafts of this paper. The assistance of Mimi Sher- win, the National Association for Law Placement, and the Institute of Industrial Relations at the University of California, Berkeley, is greatly appreciated.

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Page 3: Determinants of Firm Internal Labor Markets in Large Law Firms

and Piore, 1971; Althauserand Kalleberg, 1981). Firm ILMs are closed ILMs associated with large industrial organizations; occupational ILMs are sets of firms, each having open ILMs and operating in craft and professional occupations (Doeringer and Piore, 1971). If professional and craft occupations are occupational ILMs, then the set of firms in the labor market should have open ILMs with lateral entry into senior positions being common and promotion infrequent. Doeringer and Piore (1971: 47) describe this forcefully: "Professional personnel, such as lawyers, physicians, and nurses are usually hired into jobs at a skill and pay grade commensurate with their educa- tion and experience, with little or no prospect of internal mobility."

In view of the importance of ILM openness in understanding whether a labor market consists of a number of firm ILMs or is an occupational ILM and given its importance for firms and individuals, the scarcity of research about ILM openness is surprising. Instead of assuming that organizations operating in professional labor markets are operating in an occupational ILM, researchers should analyze promotion and lateral entry into senior positions in professional organizations to determine whether the associated firm I LMs are open or closed. The more closed the firm I LMs are, the less the labor market will resemble an occupational ILM.

In this paper, the determinants of promotion and lateral entry in large law firms (law firms employing ten or more lawyers) are developed and tested. Because firms operate in a professional labor market, senior positions should be more likely to be filled through lateral entry than promotion. This study of a longitudi- nal sample showed, however, that ILMs in law firms resemble firm ILMs, with promotion being the dominant mechanism for staffing senior positions. This suggests that the professional labor market associated with large law firms is not a strong occupational ILM.

PRIOR RESEARCH

Four problem areas can be identified in the literature on organizational influences on mobility: (1) much of the research consists of case studies rather than comparative organizational analysis (Baron, 1984); (2) organization and environment issues are ignored; (3) little attention is paid to questions of when lateral entry rather than promotion is used; and (4) differences between intraorganizational and interorganizational mobility are neglected in the research on professional labor markets.

In the typical case study, individuals or cohorts are the units of analysis and the dependent variable is individual mobility (White, 1970; Reed, 1978; Rosenbaum, 1979a, 1979b; Stew- man and Konda, 1983). Comparative studies are sparse and have produced mixed results (Bielby and Baron, 1983; Pfeffer and Cohen, 1984). These studies have focused on organiza- tional structure, such as formalized policies of promotion from within (Pfeffer and Cohen, 1984), or on individual outcomes, such as promotion (Bielby and Baron, 1983). One reason for the mixed results is that organizational structures and indi- vidual outcomes are the result of different processes (Wholey, 1985b).

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Firm Internal Labor Markets

The lack of comparative research results in the neglect of organization-environment relations, although authors of review articles assert its importance (Anderson, Milkovich, and Tsui, 1981; Baron, 1984). Little emphasis is placed on attempting to characterize the organization-environment relationship along some dimension and analyze its influences on promotion and lateral entry.

Most studies give little attention to the determinants of lateral entry; the dependent variables are usually promotions in some form. Lateral entry is neglected as a dependent variable, although it has entered some models as an exogenous variable reflecting managerial preferences (Stewman and Konda, 1983).

In studies of professional labor markets, it is essential to analyze both promotion and lateral entry to understand whether the greater mobility in the core than in the periphery of a profession signifies the presence of an occupational ILM or many firm ILMs. Smith (1983), in an analysis of college football and basketball coaches, demonstrated that mobility is greater in a core professional labor market than in a peripheral professional labor market. He asserted the greater mobility was evidence the core was an occupational ILM. However, Smith did not assess the degree to which mobility was intraor- ganizational or interorganizational. If the mobility was primarily intraorganizational, then we are observing aggregates of firm ILMs.

The research reported here explicitly addresses the problems mentioned. It focuses on individual mobility within firms (pro- motion) and between firms (lateral entry) in a professional labor market. The research does not, however, address questions of the effects of industrial differences on mobility and individual influences on mobility. Industry effects are held constant by studying lawyers in law firms. Individual influences through self-selection biases are presumed to operate primarily at an occupational level, where people decide they want to work in large law firms and be corporate lawyers. The assumption is made that lawyers' decisions about which firm to work for are less prone to self-selection biases since there are 3,260 large law firms in the United States (Curran, 1981) and law students have limited access to information about them. While a few of these firms are described extensively in directories, most are relatively unknown, and the primary way that law students obtain information about the firm is through law school place- ment offices and through friends who have worked at various law firms. The information from placement offices is relatively unambiguous: fields of specialization, personnel benefits, number of partners, number of associates, number of associ- ates promoted in the prior year, proportion of each cohort of entering associates promoted, starting salaries for associates in the prior year, etc. The information available from friends is incomplete at best, depending on where they worked. A law student will probably have a minimal amount of information to evaluate a prospective employer, which results in reduced self-selection biases at the firm level.

LAW FIRMS

Law firms operate in markets, selling legal services to clients; for large law firms, these clients are primarily corporations

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(Nelson, 1981). Law firms have two major groups of lawyers: associates and partners. Associates are lawyers who are sala- ried. Partners are not salaried but share in firm profits, which are generated by billing for associates' work at a higher hourly rate than they are paid. The partner-to-associate ratio in a law firm is a rough estimate of the amount of profits generated for partners to share, with lower ratios being associated with greater profits (Nelson, 1 981). Setting the appropriate partner-- to-associate ratio is often a major firm decision (Brill, 1 982a).

Promotion and lateral entry are easily assessed in law firms. The decision to promote an associate or bring in a lateral partner is important, since the new partner becomes a co- owner of the firm and is expected to remain a partner for a substantial period of time. Associates progress through grada- tions of associate, from junior to senior over approximately six years (Nelson, 1 983). During this period, associates receive postgraduate training in law (Smigel, 1969). In fact, some lawyers go to work in large law firms primarily to receive this training. At about six years, and no later than ten years, a partnership decision is made for each associate still with the firm (Nelson, 1 983). Lawyers can expect a permanent career with the law firm if they are made a partner; otherwise they are expected to exit. This system has been widely adopted in law firms and seems to have become an institutional myth (Meyer and Rowan, 1977).

Legal practice in law firms is subdivided into office practice and litigation (Heinz and Laumann, 1 982). Associates in litigation have less chance of becoming partners than associates in other areas (Nelson, 1983). Nelson (1983) cites three reasons. First, litigation demands longer hours than other fields. These job demands cause associates to leave prior to the partnership decision. Second, since clients want well-known litigators, usually a partner, it is difficult for associates to get cases to manage and generate a reputation. Finally, litigation skills are more transferable between firms than are skills associated with office practice. Thus, firms are more likely to recruit externally for litigators than they would be for lawyers in office practice. This competition from the external labor market should decrease promotion chances.

While the structure of law firms, especially the up-or-out rule, is rooted in an institutional myth, the actual movement of individuals through this structure reflects market and technical considerations. Differences are evident in firms' philosophies about lateral entrants and about retaining associates who are not made partners. Some firms use lateral entrants to move into new fields and attract new clients, while other firms eschew lateral entry and train their own lawyers in new fields (Brill, 1 984). Similarly, firms have differing philosophies about permanent associates, i.e., associates who are retained as associates after the partnership decision. These associates stay because they have some specialized knowledge, not generally marketable, that is useful to the firm but not useful enough for them to be made a partner (Smigel, 1969: 85). Permanent associates receive a higher salary than other associates.

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Firm Internal Labor Markets

DETERMINANTS OF PROMOTION AND LATERAL ENTRY

Promotion provides many benefits to an organization. Moving personnel through a series of progressively more demanding positions allows an organization to train and evaluate people over an extended period. The prospect of promotion serves also to motivate individuals as they compete to move to positions of higher status and pay. Lateral entry does not provide the training and evaluation benefits; however, it does allow an organization to quickly acquire expertise in a new area. Using lateral entry to staff senior positions, though, could have adverse motivational consequences on personnel already in the organization if they interpret the lateral entry as closing a potential promotion opportunity. The usual prescription from these arguments is that organizations should staff senior posi- tions using promotion, using lateral entry only as a last resort (Sayles and Strauss, 1 981). Similarly, Jacobs (1 981) argued that where individual failure can damage the organization, promotion and long evaluation periods are used to screen employees. In law firms, poor individual performance can adversely affect the firm, and work done by associates is often extensively reviewed by a senior partner before it goes out (Smigel, 1969). However, superlative individual performance can be advantageous to a firm; therefore some lateral entry is expected. The arguments lead to the following hypothesis: Hypothesis 1. Promotion in law firms is more frequent than lateral entry.

This is contrary to the prediction of Doeringer and Piore (1971) that in professional labor markets, promotion is rare and lateral entry is common.

Organizational differences in rates of promotion and lateral entry are a function of differentiation, demographics, and client relationships. Increasing differentiation, the division of labor within a firm, implies increasing specialization. In law firms, this specialization does not lead to routinization (Rosen, 1984); however, it does affect whether the skills that a lawyer de- velops are general, i.e., easily transferable between firms, or firm specific, i.e., peculiar to a firm and not easily transferable (Becker, 1975).

Specialization allows lawyers to perform delimited and sepa- rable tasks" and decrease the breadth of problems they address (Rosen, 1 984: 1 1). In assisting clients, these special- ized lawyers then apply a common knowledge specific to the type-of law being practiced (Rosen, 1984). These skills are general and transferable between firms and thus should lead to greater movement between firms (lateral entry) and less movement within the firm (promotion), as positions are more likely to be filled with lateral entrants. This suggests that increasing differentiation is associated with greater lateral en- try and less promotion.

On the other hand, specialization can lead to even more highly developed skills (Wilensky and Lebeaux, 1958). This specializa- tion could be an outcome of a law firm having a sufficient volume of business with a particular client to support special- ists whose activities are crucial in retaining the relationship with the client. The specialization could also be an outcome of developing a large volume of business in a particular area. This volume could support specialists within the firm in the particu-

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lar field who would not be supportable in other firms because the volume of business would be insufficient to occupy them full-time. Both of these specialization effects could be impor- tant to the firm because the expertise is used to keep old clients and attract new clients. Since these specialized skills and knowledge are a function of the volume of business of a law firm with a client or in an area, the skills would be firm-specific. Since firm-specific skills are positively associated with promotion (Doeringer and Piore, 1971; Williamson, Wach- ter, and Harris, 1975) and so should be negatively related to lateral entry, increasing differentiation would seem to increase promotion and decrease lateral entry. However, if the size of a law firm captures these volume effects, then, controlling for size, one can state:

Hypothesis 2. The greater the differentiation within law firms, the less the promotion and the greater the lateral entry.

The specialty most specific to the above argument is litigation. Since litigation tends to be a more general skill than other fields of law, it can be expected that:

Hypothesis 3. The greater the proportion of lawyers in litigation in a law firm, the less the promotion and the greater the lateral entry. Organizational demographics, organizational growth rates, promotion in the prior year, lateral entry in the prior year, exits in the prior year, and the ratio of partners to associates are all associated with promotion and lateral entry (Pfeffer, 1983; Stewman and Konda, 1983). As organizations grow, more employees are required. Even if entry level positions can be filled, there is still the problem of staffing partnership positions. Growth is limited by the ability to staff these senior positions (Keyfitz, 1973). Firms respond to this shortage either by in- creasing promotion (Wilensky, 1960; Reed, 1978; Rosen- baum, 1979b; Stewman and Konda, 1983; Bielby and Baron, 1983) or by increasing lateral entry (Doeringer, 1967); there- fore it can be expected that:

Hypothesis 4. The greater the growth in a law firm, the greater the promotion and lateral entry.

Promotion and lateral entry in the prior period negatively affect promotion and lateral entry in the current period. The greater the number of new partners either promoted or entering laterally, the more difficult it is to maintain a given partner-to- associate ratio and a given profitability level. This problem is met by not promoting many associates and not allowing many lateral entrants. The decreasing probability of associates being promoted makes recruiting associates more difficult and en- courages associates already in the firm to exit or perform perfunctorily. The problems of exit and decreasing motivation are addressed by increasing promotion chances for associates. These arguments imply that:

Hypothesis 5. The greater the promotion and lateral entry in law firms in the prior year, the less the promotion and lateral entry in the current year.

The direct effect of the partner-to-associate ratio, while ex- pected to be significant, is less clear. The arguments about profitability and recruitment used above imply an inverse rela- tionship. However, a vacancy-chain argument (White, 1970; Stewman and Konda, 1983) indicates a positive relationship

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Firm Internal Labor Markets

between the partner-to-associate ratio and promotion; there- fore the following hypothesis should hold:

Hypothesis 6. The partner-to-associate ratio in law firms in the prior year is related to promotion and lateral entry.

The final demographic characteristic that affects promotion and lateral entry is the number of partner exits in a current year. The effect of exits reflects two different conceptualiza- tions of firm ILMs: graded personnel, where personnel are promoted on the basis of their qualifications, and graded positions, where personnel are promoted as a function of positions being open (Reed, 1978). In graded-personnel sys- tems vacancies caused by exit should be unrelated to promo- tion, while in graded-position systems vacancies caused by exit should be positively related to promotion. The same should be true for lateral entries. If partner exit has a positive influence on lateral entry, then vacancies exist and are being filled from the external labor market. If partner exit has no influence on lateral entry, then lateral entry decisions are more a function of individual characteristics than of vacant positions. From a vacancy-chain perspective, the following hypothesis should apply:

Hypothesis 7. The number of partner exits in a law firm is positively related to promotion and lateral entry.

Organization and environment relationships further influence the development of firm ILMs. Organizations are open sys- tems, transacting with other organizations to acquire inputs and dispose of outputs (Thompson, 1967). In law firms, client relationships affect organizational structure because they are the critical source of work for law firms (Nelson, 1981). The number and addition of major clients should, therefore, be positively related to both promotion and lateral entry. First, the more major clients there are, the more partners that can be supported (Wholey, 1 985a). Second, the greater the number of major clients, the easier the access to these clients for associ- ates. Ease of access for associates leads, in turn, to improved chances for an associate to control critical interdependencies with clients, thus allowing the associate to acquire power (Pfeffer and Salancik, 1974), which can be used for promotion. Finally, adding clients is correlated with growth and should have effects similar to it. As for lateral entries, the lateral entrant's bringing new clients into a firm is often a primary impetus for a lateral entry. It can, therefore, be hypothesized that:

Hypothesis 8. The greater the number of clients that a law firm has and the greater the number of clients a law firm adds, the greater the promotion and the greater the lateral entry.

Two final factors influence promotion and lateral entry: organi- zational size and permanent associates. Size is included be- cause the dependent variables are the number of associates promoted and the number of lateral entrants. Scale effects therefore operate: the larger the organization, the greater the promotion and lateral entry. Size is also included because it has been found to be related to firm ILMs (Pfeffer and Cohen, 1 984), although it is unclear why size is related to them. As Kimberly (1976) pointed out, size is correlated with so many other factors that its interpretation is ambiguous. The presence

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of permanent associates is included because it could signify the existence of an alternative career path to partnership.

SAMPLE AND METHOD

In order to standardize recruiting at law schools and provide law school students with equivalent, comparative data about law firms, the National Association for Law Placement (NALP), in its Directory of Employers, has been annually collecting and distributing information about law firms. The data are provided by the law firms, which are usually required to provide such data to gain access to campus placement facilities and law students.

The NALP directory includes the name of the law firm, the size of the firm (including the number of partners, associates, paralegal aides, and support staff), areas of law in which the law firm claims expertise, and the number of lawyers in each area where expertise is claimed (divided into partners and associates). There are 80 firms for which data for every year from 1979 to 1982 are available. The study reported here was based on these data.

The data set is a sample of convenience, being only law firms recruiting at various law schools participating in the NALP, and is biased toward large law firms. The bias has various sources (Wholey, 1984). First, recruiting needs could generate bias. Only law firms actively recruiting are included in the sample. The smaller the law firm, the fewer associates that the law firm needs to recruit and the less likely the firm is to recruit every year. Second, law firms recruiting at prestigious law schools are probably oversampled, and it is primarily large law firms that require graduates from these schools.

Although major, large law firms with corporate clients are overrepresented, they do have a major influence on the prac- tice of law in the United States (Carlin, 1966; Smigel, 1969). Also, there is substantial variation in the sample. The smallest firm in the sample had 16 lawyers, while the largest had 345. Growth ranged from a decrease of 1.1 percent to an increase of 42.1 percent, with a mean of 8.6 percent. Declining law firms might have continued to recruit to maintain ties with law schools and to attract potential high-quality lawyers. Since the sample is different from the variation in the universe of all law firms, however, the model estimates should be interpreted with caution. To determine if the biases due to size were major, the models were weighted to obtain a size distribution equivalent to the universe of all large law firms. The results estimated with this weighting were similar to those reported.

Law firm size was coded as the total number of partners and associates in the firm for a given year. Growth was the difference between size in the current year and size in the prior year, divided by the size in the prior year. Differentiation was the number of fields in which a law firm claimed expertise. Other measures of differentiation, such as the Herfindahl- Hirschman Index, were tried in order to capture concentration of personnel in various fields. These measures are highly inversely correlated with the number of fields and produced similar, though opposite, results as the number of fields. The proportion of lawyers in litigation was the ratio of the number of lawyers listed as being in litigation relative to the total

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number of lawyers in the firm. The partner-to-associate ratio is self-descriptive.

The Martindale & Hubbell Law Directory was used to construct the measures for promotion, lateral entry, permanent associ- ates, and number of partners exiting. The directory lists all lawyers practicing in the United States and has been published annually since the mid-1 930s. Individual lawyers and law firms are listed by geographic region, and each lawyer in a law firm is listed as either an associate or partner.

The number of promotions was the number of partners listed as associates in the prior year's directory, and the number of lateral entries was the number of partners who were not listed as associates in the prior year's directory. The number of firms having a given number of associates promoted and lateral entrants each year is presented in Table 1. In 1 980, 1 981, and 1982, there were 183, 231, and 196 promotions and 55, 43, and 83 lateral entries, respectively. Promotion was a much more common phenomenon than lateral entry. Approximately half of the firms in each year did not have a lateral entrant, while at most one-fifth of the firms in each year did not have a promotion.

Table 1

Number of Firms Promoting Associates or Having Lateral Entries by Year

Number of Promotions or 1980 1981 1982 All Years Lateral Entries Promotions Entries Promotions Entries Promotions Entries Promotions Entries

0 21 48 17 51 14 35 52 134 l 14 19 7 19 16 26 37 64 2 10 7 11 7 17 11 38 25 3 16 3 16 2 12 4 44 9 4 8 2 13 1 7 0 28 3 5 4 1 8 0 8 3 20 4

>5 6 0 8 0 5 1 19 1

The number of partners exiting was the number of partners who were listed in the prior year's directory but not listed in the current year. Permanent associate was a measure constructed for all firms; it was coded one if there were any associates who were listed as associates in the directory ten years prior to the current year, otherwise it was zero. Since partnership decisions are made around the sixth year (Nelson, 1983), any associate still classified as associate could be considered to have been bypassed for promotion.

The Legal Connection (Harris, 1979; 1982) provides data on the linkages between publicly held organizations and law firms. The 1982 edition reflects data primarily from 1980, with some data from 1 981, while the 1979 edition reflects data from 1 978 and 1979. The Legal Connection staff has compiled data on linkages between publicly owned organizations and law firms from reports filed with the Securities and Exchange Commis- sion. For each law firm, the number of linkages was the number of corporations listing the law firm as its outside counsel or listing a member of the law firm on its board of directors. Either relationship usually reflects a close and sub- stantial linkage. The change in linkages was the change in

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number of linkages. Since the measure for client linkages was available only for 1979 and 1 980, a first-order regression, using only exogenous variables as independent variables, was used to calculate values for 1981 and 1982. The equation used was: client linkages = .72 + .72 * lagged client linkages + .07 * lagged partners + .07 * lagged exits + .17 * lagged promotions - .04 * lagged firm age.

Lagged variables are lagged one year. The R-square for the predictive equation was .86. Although having measured values would obviously be better, the equation has two strong points. First, in the case in which the predictive equation has an R-square of better than .50, a regression equation is better than substituting the means of the variable for the missing values (Maddala, 1977). Second, the lagged dependent vari- able is used, taking into account the chronological character of the data.

Each law firm in the sample had three waves of observation (observations for 1979 were used to generate change and lag variables for 1980). Means and standard deviations of the variables for each year are reported in Table 2. The average number of promotions was substantially greater than the aver- age number of lateral'entries. Overall, the average size of the firms increased over the period. The average partner-to- associate ratio (1:1) and differentiation (7 fields of expertise claimed) were relatively constant.

The hypotheses were tested by regressing number of promo- tions and number of lateral entries on the independent vari- ables. Since the dependent variables are truncated, with a

Table 2

Means and Standard Deviations* by Year

Variables 1980 1981 1982

Number of promotions 2.45 2.89 2.66 (2.59) (2.34) (2.75)

Number of lateral entries .69 .54 1.04 (1.09) (.86) (1.42)

Permanent associates .10 .06 .08 (.30) (.24) (.26)

Lagged firm size 88.38 93.41 100.40 (59.74) (61.59) (64.77)

Change in firm size .07 .09 .11 (.09) (.08) (. 1 0)

Differentiation 7.33 7.31 7.29 (2.51) (2.49) (2.35)

Lagged partner/associates .96 .98 .96 (.43) (.39) (.39)

Proportion In litigation .27 .27 .27 (.13) (.12) (.12)

Lagged client linkages 12.79 11.28 10.73 (12.92) (11.33) (9.52)

Change in client linkages -1.51 -.55 -.17 (4.46) (2.27) (1.70)

Number of partners exiting 1.85 1.64 1.71 (2.13) (1.68) (1.88)

Lagged promotions 2.76 2.45 2.89 (2.46) (2.59) (2.34)

Lagged lateral entries .63 .69 .54 (.99) (1.09) (.86)

*In parentheses.

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Firm Internal Labor Markets

lower bound of zero, and since they do not have a normal distribution, significance tests should be interpreted cau- tiously. Because of the truncation, coefficient estimates are potentially biased (Tobin, 1958). To check this, OLS estimates were compared to estimates using a Tobit model, and the results were similar, but the estimated model does not correct for this potential bias.

Promotion and lateral entry decisions could be viewed as simultaneous decisions; however, the specification captures simultaneity problems. First, the lagged dependent variables reflect some of the simultaneity. Second, the promotion pro- cess suggests that a lag structure is appropriate. As associates progess toward partnership, they are continually evaluated and attrition occurs, as those who will clearly not be promoted exit. By the last year before promotion, only those associates with the best chances of becoming partners are left, and many of these associates are promoted. Promotion and lateral entry in prior years thus have a greater bearing on current decisions than promotion and lateral entry in the current year. Third, lateral entrants might represent opportunities that arise and disappear quickly and about which independent decisions are made. For example, a noted partner in another law firm could be dissatisfied with his or her share of the profits in the firm he or she is in and make him or herself available to other law firms. To capitalize on this opportunity, the firm hiring him or her would have to move quickly.

Ordinary least squares was an inappropriate estimator because it is biased. Organizational effects not specified in the model, such as compensation practices or governance processes, are forced into the error term and are included in the lagged dependent variable. This results in autocorrelation and correla- tion of the error term with the lagged dependent variable, violating OLS assumptions. Tuma and Hannan (1984) recom- mend using a generalized-least-squares procedure to correct for this bias. The data were pooled over the cross sections and time series, and the error term was partitioned into two components: a law-firm-specific component and a random component. The law-firm component was assumed to vary between law firms but be constant within a law firm and to summarize "all of the unobserved causes of Y [the dependent variable] which are relatively constant over time" (Hannan and Young, 1977: 60). Because a plot of residuals for unweighted models showed heteroskedasticity was present, a weighted generalized least squares was used. The weight was the lagged size variable.

Pooling cross sections and time series presumes that the causal structure, the slope coefficients, was stable over time (Hannan and Young, 1 977). To test the null hypothesis that there is no difference between slope coefficients over time, an F-test was used (Johnston, 1972). The null hypothesis of no differences in the slope coefficients over time could not be rejected at the I10 level for either promotions or lateral entries.

RESULTS

The results of the weighted generalized-least-squares regres- sion are listed in Table 3.

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Table 3

Weighted Generalized-Least-Squares Regressions for Promotions and Lateral Entries (N= 240)

Variables Promotions Lateral Entries

Permanent associates 1 .69- -.31 (.79)t (.45)t

Lagged firm size* .01760 .006-o (.006) (.003)

G rowth 1.04 .11 (.75) (.45)

Differentiation --.027 .02 (.058) (.03)

Lagged partner/associates* .06 .12 (.34) (.18)

Proportion in litigation -,89 -_17 (1.25) (.69)

Lagged client linkages .08g@ -.007 (.03) (.019)

Change in client linkages .28g@ .086*9 (.06) (.033)

Number of partners exiting* -_065 .026 (.077) (.045)

Lagged promotions - 1900@ .095*.. (.07) (.040)

Lagged lateral entries -.08 --.086 (.11) (.070)

Constant* 1.31 so --.13 (.71) (.37)

Mean of weighted dependent variable .025 .008 Standard error of estimate .026 .01 5 Adjusted R-square .51 .23 F-ratio 24.54se 8.03*-

Op < . 1 0; * p < .05; *0 p < .01. *Two-tailed test; all other tests are one-tailed. tStandard errors are in parentheses.

The models for promotion and lateral entry have reasonable explanatory power, with R-squares, adjusted for degrees of freedom, of .51 for promotions and .23 for lateral entries. Lateral entry is much more difficult to predict than promotions, though, suggesting that it is a more random process.

Using average values for all the independent variables in 1 982 gave 3.23 expected promotions and .86 expected lateral en- tries, which supports hypothesis 1. To address the question of whether the set of law firms studied constitutes an occupa- tional ILM or a set of firm ILMs, the criteria for defining firm ILMs used by White and Althauser (1 985) were used. They argued that the bank they studied was a firm ILM because 25 percent of the staff were promoted in a given year, and "80 percent of positions above entry level were filled by internal upgrades," both "record performances" for the bank (White and Althauser, 1985: 380). They further asserted that most of these moves were job upgrades. In the present study, 75 percent of the partnership positions were filled through promo- tion, which is definitely a job upgrade. Also, lawyers who enter a law firm as associates have a 50-percent chance of becoming partners (Wholey, 1 985b). These figures are close enough to the criteria suggested by White and Althauser to indicate that each of the law firms studied was a firm 1LM.

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Firm Internal Labor Markets

Although the values for differentiation are in the directions implied by the general skills argument in hypotheses 2 and 3, they are not significant. The other measure of differentiation, the proportion of lawyers in the firm involved in litigation, is also not significantly related to promotion and lateral entry.

Growth is associated with an increase in the number of promo- tions, as predicted in hypothesis 4, and has no effect on lateral entries. The unexpected lack of effect of growth on lateral entry might be due to the effect of lagged promotions on lateral entry, which is discussed below. The large and signifi- cant positive influence of growth on promotions and its low and insignificant influence on lateral entry imply that growth leads to closed firm ILMs.

As predicted in hypothesis 5, lagged promotions and lagged lateral entries have a negative effect on promotion, although the influence of lagged lateral entry is insignificant. Promoting a large number of associates or hiring lateral entrants can be interpreted as driving down firm profitability, thereby decreas- ing promotion. The results for lateral entry are not so clear. While lagged lateral entries have a negative impact on lateral entry, as predicted, lagged promotions are positively related to lateral entries, although the magnitude of this effect is not very large. When all independent variables are held at their means, a 1-percent change in the lagged number of promotions leads to only a .3-percent change in the number of lateral entries in the current period. This effect is difficult to explain and might be a consequence of lateral entries having a lower bound of zero. Therefore, the true negative effect of a large number of promotions on lateral entries cannot be observed, biasing the coefficient estimate for the effect of lagged promotions on lateral entries upwards. One explanation might be that law firms go through growth phases in which they actively recruit lateral entrants and hire new associates to maintain a given partner-to-associate ratio. In this case, lagged promotions, which are an outcome of growth, can also be interpreted as a measure of growth. This implies that growth causes increased lateral entry. If this is the case, then the finding that growth, as measured by change in partners and associates in the aggre- gate, is unrelated to lateral entry becomes more understandable.

Contrary to hypothesis 6, the lagged partner-to-associate ratio has no significant influence on promotion and lateral entry. This contrasts with the finding of Stewman and Konda (1983) that grade ratios, the number of personnel at one level divided by the number of personnel at the level immediately below, were positively related to promotion. There are three possible ex- planations for this difference in findings. First, the dependent variable is different. This study was based on the number of promotions, while Stewman and Konda (1983) used the pro- portion of people from the lower level who were promoted. However, Wholey (1 985a) analyzed the proportion of each cohort promoted and found a significant negative effect of grade ratios on promotion chances. This suggests that grade ratios do not affect the number of promotions but do affect the proportion of promotions. Second, this finding could be reflect- ing the net effects of two competing processes: the effects of profitability and grade ratio, resulting in no effect on promo- tions. This suggests that better measures of law firm profitabil-

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ity might be used in fully understanding the effects of grade ratios. Third, the samples are different. Stewman and Konda studied highly bureaucratic organizations, while this study was an analysis of professionals in firms that they own. The dynam- ics of profit generation and allocation, a firm's political econo- my, are substantially different between these organizational forms and could lead to different relationships between grade ratios and promotion. Overall, the implication is that vacancy- chain effects through grade ratios are partly a function of how profits are generated and allocated in organizations. Analyzing the political economy of a firm explicitly is essential for under- standing the mobility of individuals (Wholey, 1 985b).

Because exits do not influence promotions and lateral entry, vacancy-chain effects suggested in hypothesis 7 may not be operating. Law firms may have firm ILMs based on graded personnel rather than on graded positions.

As predicted in hypothesis 8, changes in clients have a positive impact on both promotion and lateral entry; however, the number of clients has a strong positive effect only on promo- tion. This difference is probably due to control of access to the clients. Associates who are eligible for promotion have access to the clients and can use control over a critical resource in bargaining for partnership. On the other hand, lateral entrants have no access to the clients already with the firm until they enter the firm. Since they lack access to a critical resource, power cannot be derived from it.

The positive influence of size on promotion and lateral entry is most reasonably interpreted as a scale effect. The presence of permanent associates is positively and significantly related to promotion and negatively, although insignificantly, related to lateral entry. This finding is addressed below.

DISCUSSION

Law firms seem to have firm ILMs, staffing senior positions predominantly through promotion. Nelson (1983) found that most associates who do not become partners tend to go to work for corporations, go into individual practice, or go to work for smaller firms, all considered downward moves. Those who become partners tend to stay with the firm, although a few do move laterally between firms. If upward career opportunities available to lawyers are primarily in law firms through promo- tion, then the overall labor market associated with the lawyers employed in these firms seems to be better described using firm ILMs rather than occupational ILMs. For lawyers working on corporate problems, employment opportunities are pre- dominantly within firms similar to the ones analyzed in this study. This implies that the labor market associated with lawyers working on corporate legal problems can be best described using firm ILMs. Thus, more attention needs to be paid to identifying occupational ILMs, rather than just presum- ing that labor markets associated with professionals are occupational ILMs.

Since law firms have firm ILMs, using job ladders and promo- tion up those ladders to motivate, train, evaluate, and retain lawyers, why should a law firm use lateral entry? Lateral entry could be used (1) to staff positions when there are no qualified personnel to promote, and (2) to respond to a strategic oppor-

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Firm Internal Labor Markets

tunity. Three reasons support the strategic-opportunity view- point. First, saying there are no qualified personnel to promote implies there is a position into which one can be promoted. If this is true, then the vacancy-chain hypothesis (hypothesis 7) that exits should be positively related to promotion and lateral entry should have been supported. Second, if similar process- es operate to create positions, which are then staffed through either promotion or lateral entry, the predictive power of the regression equations for promotion and lateral entry should have been of similar magnitude. Finally, the large stochastic component for the lateral entry equation suggests that lateral entry is a substantially less predictable process than promo- tion. Taking advantage of an opportunity, such as the availabil- ity of a particular lawyer, is a much more random process than hiring many lawyers and selecting a few for promotion.

If the presence of permanent associates signified an alterna- tive career path to partnership, then an inverse relationship between presence of permanent associates and promotion would be expected instead of the positive relationship found. The observed positive relationship could be caused in three -ways. First, a positive relationship could be due to associates in a few firms being given a number of opportunities at partnership, not being forced out until after the tenth year. In this case, the pool of potentially promotable associates is increased and the number of promotions should increase. This does not seem likely, because the number of years to the partnership decision for the law firms with permanent associ- ates averages 7.5 years with a standard deviation of .66 years. Second, permanent associates could measure a law firm's unwillingness to force lawyers out and thus indirectly measure softness in terminating associates. If the firm is unwilling to force associates to leave and only a portion of the associates make partner, more promotions would imply larger cohorts of entering lawyers. Larger cohorts would imply more associates left as permanent associates because of the firms' unwilling- ness to force associates to leave. The net result is a positive relationship between permanent associates and promotion. Third, the presence of permanent associates could also be an indirect measure of firm-specific skills (Becker, 1975), which have been argued to be positively related to promotion ladders and negatively related to lateral entry (Doeringer and Piore, 1971; Williamson, Wachter, and Harris, 1975). Similarly, the presence of permanent associates could be a surrogate for the age of the firm. Again, this is a proxy for firm-specific skills, if it is presumed that firms develop idiosyncratic standard operat- ing procedures as a function of the problems they work on. The greater the experience with problems, that is, the greater the age of the firm, the more idiosyncratic and firm-specific the operating procedures will be. With an argument similar to the immediately preceding one, this again implies that permanent associates have a positive relationship with promotion and an inverse relationship with lateral entry. Thus, permanent associ- ates might more likely be a measure of firm-specific skills or a measure of softness in the promotion system.

The nonsignificant negative relationship between permanent associates and lateral entry fits in with the opportunity view of lateral entry and the interpretation of permanent associates having firm-specific skills. If lateral entrants are being recruited

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as strategic opportunities, rather than as lawyers to fill a predefined position, then firm-specific skills should not influ- ence the decision. The lawyers are being recruited not for their ability to perform functions within the firm but to bring new expertise and clients to the firm. These interpretations of the effect of permanent associates on promotion and lateral entry should be regarded with caution. Further research using better measures of firm-specific skills in law firms is clearly needed.

The vacancy-chain arguments do not receive strong support. First, the number of partner exits is not related to either promotion or lateral entry. Second, if there was a vacancy- chain effect through the partner-to-associate ratio, it was mod- erated by considerations of profit generation (Wholey, 1 985a). However, growth does lead to increased promotions, a finding supporting vacancy-chain arguments. What seems to be occurring is that law firm ILMs are based more on graded personnel than on graded positions. In professional settings, acquiring personal markers signifying competence seems more important than vacancies in explaining promotion. This view is reflected in the linking of the quality of a cohort to the number of lawyers promoted (Brill, 1 982b). Further research into the mechanisms of how individuals create their own positions is clearly called for, as well as further research into the dynamics of graded personnel and graded position sys- tems (Miner and Estler, 1983).

The ability of lawyers to get clients, i.e., to control a critical resource dependency, demonstrates how crucial organization- al and environmental interactions are in explaining promotion and lateral entry. This relationship is in accord with Baron's (1984) suggestion that analysts of firm ILMs should seek to understand the political economy and resource dependencies of the organizations they are studying, in order to understand career dynamics and staffing decisions in organizations. Since the results in the present study are derived from using data aggregated to the firm level, further research using individuals as the units of analysis is called for. The ideal model for analyzing the promotion of individual lawyers based on their control of critical resources would be to estimate the chances of promotion of lawyers as a function of their ability to bring in business. Since lawyers who bring in clients are paid more than other lawyers in law firms (Maister, 1984), it is likely that client control and promotion are probably also positively related.

Care should be taken in generalizing from this research. Only the career ladder associated with lawyers in law firms was studied. It is not clear that these results generalize even to other occupational categories, such as clerical support staff or paralegal aides, within law firms. Doeringer and Piore (1971) aruged that job ladders within organizations are often delimited by occupations, sequences of skill development, job content, or functional departments. Within law firms, movement from clerical support staff or paralegal aide to the lawyer ladder is virtually nonexistent. What the findings in this paper do sug- gest, though, is that occupational job ladders do exist for lawyers within a law firm. Further research is necessary to understand the relationship between different job ladders within a firm.

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Even though this research focused on lawyers in law firms, it does demonstrate the importance of analyzing organizations and firm ILMs to understand individual outcomes. The study of professions has long focused on individual determinants of mobility and has neglected structural determinants. This re- search demonstrates the influence of organizations on mobility even in professions.

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