Career paths reflect outside opportunities
In professional service firms where human capital is the main asset, attracting and retaining talented workers is key. This might mean showing prospective hires a potential path to eventually becoming a partner and spending one’s career at the firm. But professional service firms have far fewer partners than associate positions, and the dominant paradigm in these firms has long been that of `up-or-out’: either you make it to partner, or you leave.
Professional service firms often have to sell themselves as workplaces where workers can build a career, even if it's in another firm.
To make such positions still attractive to employees, despite that winnowing down, firms need to promise workers that even if they don’t get to partner, the job is still a safe proposition, because they’re going to get a job of equivalent quality somewhere else. That’s why firms have developed outplacement practices in which they will help you to land that job elsewhere. Professional services firms thus often have to sell themselves as workplaces where workers can build a career—even though, perhaps paradoxically, their ascent is likely to take them someday to another firm.
Cultivating opportunities through task assignments
In following that strategy, firms also have to keep in mind that how employees grow and get ahead in their careers—and what motivates them to do their best—has a lot to do with what sorts of tasks they’re assigned to perform. If you’re a worker who is assigned routine tasks that don’t require talent, no matter how well you perform, the output stays the same, and the job is completely uninformative when it comes to displaying your abilities. In contrast, if you’re assigned to more challenging tasks, performance becomes highly indicative of talent. This in turn provides incentives for employees to outperform to showcase their skills to potential employers. One way to motivate young employees is to assign them to tasks in which they spend lots of time with the clients, so they get important exposure on the labor market. The firms know that in the end, the clients are going to get to know those employees and develop confidence in their abilities, and possibly want to hire them. This looks self-defeating for retention purposes, but that potential opportunity creates an incentive for employees to demonstrate their value to prospective employers, which ultimately benefits their current employers.
Striking a balance for mutual investments and shared benefits
While a higher exposure of employees’ performance thus indirectly benefits the firm through heightened employee motivation, it also increases the wage that firms need to pay to retain their employees. This possibly limits their incentives to staff them on more risky tasks since recouping the benefits from such an investment is only possible when futures wages are not too large. In a situation where the worker got all the return from such an investment, the firm won’t have an incentive to make decisions to create those opportunities. An essential challenge is thus to find the extent of exposure that strikes a balance between workers’ and firms’ incentives.
Now, many such firms have created permanent non-partner associate positions for which no outplacement effort is needed.
Bar Isaac and Levy’s work allows to better understand that there isn’t a single approach to this problem. Indeed, different firms will choose different human resources policies. Some firms strategically differentiate by offering a high exposure to their employees, guaranteeing them to remain highly employable, and hence to rise professionally. These firms are able to attract, motivate, and possibly retain the best talents. Instead, other firms do not afford the effort that managing employees’ future employability requires, and thus offer flatter career paths. The evolution of the internal organization of professional service firms illustrates this possibility to sustain different corporate cultures: while up-or-out contracts that required workers to leave if they didn’t make partner after a set number of years used to be almost universal, some firms have abandoned that approach altogether, and many now have created permanent non-partner associate positions for which no outplacement effort is needed.