Cravath, meritocracy at work
Saturday April 11th 2020 by SocraticDev
Being hired by a 'high-end' consulting firm is, for many freshly graduated students, like having won the lottery. Large firms pay excellent wages and benefits. They can therefore afford to hire only best talents. They often bear the names of their founders or partners such as Bain, McKinsey, Oliver Wyman, L.E.K., A. T. Kearney, KPMG, Deloitte, Ernst & Young, and PricewaterhouseCoopers. Other times not: Accenture and IBM.
The roles are prioritized in a concrete way. Newly graduated students start as Associate and new employees with previous experience starts as a Consultants. New employees are expected to become independent and contribute quickly. After the role of consultant, they are promoted to the role of Project leaders where they manage a team of associates and consultants. After two years of good work as a project leader, they can be promoted to the role of Directors where they will be called to manage project leaders and their teams. If all goes well as Directors, they will finally be invited to become Partners of the firm and later, Senior partners. Compensation for senior executives is often in the 7-digit range and stirs up the envy of many.
Even if the nomenclature of titles differ from one organization to another, the idea is the same. First, we prove ourselves with others. Then we go up one step at a time if we is good and that our performances impress the leaders.
The distribution of the staff of a firm has a pyramid shape: many consultants and very few partners. Obviously, not everyone can become a partner! Or we climb the ladder or else we leave.
“You know that you will be promoted or that you will get kicked out, although no one is ever really fired. Instead, you hear that someone has left the company to seize an "industry opportunity". What you don't hear is that it wasn't 100% their choice. And it happens every step of the way. There is constant pruning. "
The Cravath system
The Cravath system derives from the name of Paul Cravath, a partner lawyer in a large New York firm at the beginning of the 20th century. He had a vision against the tide about how a firm should be run. A merciless system where alone the best performers are rewarded and the others rejected.
Here are some principles of the Cravath system:
- Hire the best lawyers from the best law schools. Look at the academic grades as a way to predict their success in the legal field;
- Pay them well. Until Cravath, young lawyers trained themselves, exchanging their time for training. Paying young lawyers was revolutionary.
- Train them thoroughly by rotating assignments. Cravath did not believe in silos. He believed that widely experienced lawyers brought the most value to clients.
- Reward merit. Cravath believed that you had to run your business like a meritocracy. The young lawyers were promoted for success, or if they did not succeed, they were dismissed.
Advantages of the Cravath system
Today almost all consulting and professional services firms are managed this way.
- Leverage effect: partners can be paid more if they not only invoice at their hourly rate but also take a share of what their junior associates invoice. If you just charge at your rate, there is a limit to what you can do, but if you act as a value-added reseller of other people's time, there is no limit to what you can do. Your compensation is solely based on the size of the assignments you find and the number of people needed to do the work. It is the business model.
- Motivation: young associates will work longer hours, working with enthusiasm, if they feel that one day their reward could be millions of dollars. They also know that if they don't, they will be fired. Call it the carrot and stick approach.
- Quality: it is difficult to hire well. Using the best schools as an initial screen to find out who is good and who is not is saving time.