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Buying Options on Lawyers

Buying Options on Lawyers | Human Resource Executive Online Several law firms are paying newly hired associates to not show up for work just yet. They are betting they can mitigate the potential risk of not finding equally qualified job candidates later. Is it an approach that makes sense?

Tuesday, May 26, 2009
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Law firms are very competitive with each other in the hiring game, trying their best to lure the brightest graduates of the best law schools with salaries that in major markets hit $150k this past year. 

Like most commercial operations this year, however, law firms are struggling, and many are cutting back in a big way. It may not be surprising that they are also competitive with each other in the way they are cutting back. 

In this case, it's how much they are paying new associates not to come to work. 

What has happened is that the firms extended offers, typical of last year, to summer interns and now find that they cannot use them. The Web site www.abovethelaw.com reports that New York firms Stroock & Stroock & Lavan LLP and Pillsbury Winthrop Shaw Pittman LLP are paying associates $75,000 and $60,000, respectively, to not show up for work. 

This is like a severance payment for people who have yet to start work. No doubt part of their interest in doing so is to maintain their reputation -- their brand -- in the competitive law-school market, but it is also a very responsible thing to do. 

More interesting are the approaches taken by other firms to pay associates to delay their start date. Morrison & Foster, for example, offered associates $5,000 per month and $500 toward healthcare costs to wait until April 2010 to begin work. 

Sidley Austin is one of the firms taking this one step further, paying associates $75,000 to wait until January 2011 and to spend the time in between working for public-interest law programs. Presumably the firm gets the credit for the pro bono work, and the associate gets some additional experience before beginning their permanent career. 

Paying employees to wait to start work is the equivalent of buying an option on human capital: We pay a sum now to ensure that we will have a qualified person show up in the future. It's an interesting approach that one could generalize to other occupations. 

How should we think about whether this approach makes sense? 

The price of the option is the amount the firms are paying their associates to come back later. What's the value of the option? It is equivalent to eliminating the risk of not being able to find equally qualified candidates in the future period. 

This approach basically creates a bridge between two labor-market situations: the current one, which is a buyer's market, and a possible future one, which might be a seller's market.

The firms that are doing this are placing a bet that next year, it will be more difficult to hire equivalent candidates. 

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There is a risk to the firm, of course. If the market stays down, the option essentially becomes worthless as the firm would have had no problem hiring associates, perhaps even more cheaply than they can do now. There is also some risk that the associates might not show up. (Oh, I forgot, these are law firms: They can sue for broken contracts.) 

Does it make sense for the associates to take the money and wait? If an associate really wanted to maximize their life income, they would want to start working right away and make the big salary. 

But not everyone sees that as the goal, and for many, this offer represents quite an unusual opportunity to step away from an intense career at minimal cost: Taking a year off when one's career is already up and running represents a much bigger cost, not only in lost salary but in the difficulty of picking things up when one comes back. Clients don't want to wait.

If you were an associate in the current market, which would be more attractive: $75,000 to walk away altogether or $75,000 to wait a year? If you thought you could get another good job now, the walk-away money is gravy. But if you thought you'd have to take a step down to a lower-tier job, maybe it would be better to wait. 

At least one clever associate pointed out that they would be happy to be paid to not work for several firms at once. 

Somehow I don't see this trend spreading to, say, the auto industry ... .

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School. www.talentondemand.org.

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