> The firm starts to underpay those better workers who kept their jobs, akin to making them pay for being “chosen.” Consequently, profits do not decline and may even increase.

> “Firms now essentially can threaten the remaining employees: ‘Look, I can let you go, and everybody’s going to think that you’re the worst in the pool. If you want me not to let you go, you need to accept below market wages,’”

This is exactly what unions are for. Any time there are enough skilled workers avilable that a company can let good employees go as a warning to others not to complain about substandard wages it's clear that the imbalance of power has resulted in exploitation. There is strength in numbers though which is why companies go to great lengths to convince people that you all alone negotiating with a huge corporation of people who have more money and resources than you'll ever see in your lifetime and who can replace you with someone else easily is somehow totally fair. No matter how special they might make you feel, you are almost always disposable to them and they will drop you at any time and for any reason, even if it's just to make an example out of you to keep your ex-coworkers in fear.

For the very few employees out there who actually are totally indispensable, any sane company would be looking for your replacement immediately because there's no telling what might happen to you or when. No company should fail because one employee dies in a car cash or gets a cancer diagnosis. Until you are also replaceable the company isn't safe. They'll pay you handsomely to keep you, right up until the moment they don't have to.

No. The reason top firms part ways with good workers is usually political. Either the manager doesn't like the person regardless of their work abilities, or the manager is not politely savvy enough to ensure their team is being recognized for work that grows or is valuable to the business. Or they get caught up in the endlessly popular reorgs (again management failure). It's a failure of management. Nothing more. Nothing less. A healthy market would encourage good workers to move around freely (through compensation, opportunity, benefits, location, etc..), not force their hand. And healthy organizations would recognize talent and retain/retrain as needed.

I think the other thing that's perhaps missing is that some companies have so much momentum (with thousands of people) that it probably doesn't matter when they lose people. The company will continue to thrive because there is demand for the product.

As I understand it, the process is known as up or out (https://en.wikipedia.org/wiki/Up_or_out) and exists due to a the known corporate structure required to do consulting work. I have no clue about its effectiveness, but all the work I've ever seen done by Deloitte, McKinsey, or PWC was mediocre at best which to me would signal that the process probably rewards a different incentive set than they intend it to. For the rest of us its likely a lesson in the power of branding. To quote Matt Damon: "(they are charging you for) an education you coulda got for $1.50 in late fees at the public library"

The only other thing I have to say about it is I have noticed a high correlation with the reports produced and the things employees have been telling management to do for a long time - that is to say, there is some utility to having an outsider provide the information... even if that information isn't novel at all.

This ignores everyone else's agency in this decision.

The top employee is probably getting noticed and headhunted by the clients.

The top employee is probably getting pissed off at the mediocrity surrounding them, and annoyed at constantly having to share credit for their hard work with their bad manager who did nothing.

The top employee quickly realises that this is a badly-paid gig, and plans to spend the minimum time doing it that will confer the necessary Resume points.

The worst employee has no other options, is scared of losing this gig because they struggle to find other gigs, enjoys being able to hide their mediocrity in the team, and will stay as long as possible. They'll probably end up being promoted.

This article didn't make complete sense to me. However I think what it describes overlaps somewhat with the "Cravath System" https://en.wikipedia.org/wiki/Cravath_System

The wiki page doesn't do it full justice, as I understood it it is:

* A firm can easily end up in a situation where weak performers stay as long as they can, and strong performers leave because they can operate independently. This can have a very strong effect because the partners or permanent management starts seeking out work to keep the bulk of their remnant people busy, which is not the high end work that builds the firms reputation.

* Instead, make offers every year to the top 3 people from each Ivy League law school, but the offers are for 18 months only.

* If the new people aren't going to make partner ever, don't keep them around. Let them know well before the 18 months are up, and have them pick the corporate clients they like and work with them so they can jump over to working for the client directly, and they will then always come back to the mothership when the giant, interesting, complex case comes along.

* Out of each "class" you make partner offer to only the best, maybe none, each year.

This differs from the article because the firm is keeping the best and sending out the rest.

But maybe most firms aren't like the Cravath, they prefer to over charge clients for a weak performer then charge and pay a strong performer ? Maybe this makes sense if you have a very short term view of the life of your firm and it's reputation ?

My experience with consulting firms is there are two paths for high performers. Either you move into a sales/relationship focused role (which there are fairly limited slots for) or you move client side and probably buy from your old employer. The good workers do well either way (when I say move client side, I mean to high level positions - importantly one with control over a budget to afford consultants) and the consultancy makes money both ways.

How to tell that some "researchers" spent too much time in economics classes and not enough time in ethics classes: they publish stuff like this (source [0]).

[0]: https://www.aeaweb.org/articles?id=10.1257/aer.20200169

The method used in all the big4s in India is this: You join and do well as usual. Your credit is shared by those above you. You continue to do well, your manager gets promoted or you get a manager who needs a promotion and needs the credit you generate. He gets promoted, aggregates your good work and shows it as his. You then get sidelined, PIPed, or leave in disgust.

It's political and I have begun to strongly believe that the best leave or are schemed against by the mediocre cabal. You cannot continue in a large firm in India if you are anywhere near good.

McKinsey a top firm? The report seems to focus on consultancies which are notorious for leeching huge amounts of money from non-specialist organisations by selling "expertise" to low-calibre execs in their clients in what is essentially an entrenched political merry-go-round.

The premise here might have some insights, but is hardly paradoxical (missing from the title posted here); you'd expect low-quality firms to have low-quality practices.

It looks (to me) like they're saying that the margin (amount that firms can charge clients less the cost of the employee's compensation package) is what's at stake.

As employees rise up the corporate ladder, their compensation packages increase, but the amount that the company can charge for that employee's work is limited (clients will be wanting to keep a certain margin for themselves too)

Every job I've ever had started great with a small team who was actually interested in the company and its goals. Then eventually the company scales up, gets acquired, or IPOs or some other sign of maturity and a new group of leadership is brought in from a legacy/Fortune 500 type of company. That new group of leadership brings their own cabal/clique and they only promote themselves and start slowly pushing out the original employees and workers who got the company to where it is... the smart people see what's going on and move on to other companies as it slowly becomes hijacked from within and at the same time 'matures' and becomes a slug and incapable of improving or adapting.

Either fired or just leaving by themselves. My theory: it has to do with middle managers, who mostly are less capable in technicalities, not smart enough, and aren't born leaders otherwise they would have been doing their own business, so they prey on those good ones since they have nothing to do all day except politics and scheming around compared to the others who spend most of their day building or doing actual work.

German (and Japanese) industry has the exact opposite attitude and it makes me very curious what "top employees" means here, the only example given are managers, which is a group of people where performance is very difficult to measure and often based around person networking abilities and entirely divorced of performance.

That said any developer and engineering should be extremely careful when it comes to unions. In Germany they typically agitate against the interests of the engineers, especially in large companies. This comes naturally as unions get power according to democratic principles, so in most cases they agitate for benefits for unskilled workers at the cost of the engineers. At companies I worked for the Betriebsrat, which is staffed by the elected union, actively advocated for outsourcing engineering activities, so that manufacturing workers can get increased benefits.

I'm sorry, this article reads like something a low-level HR drone was ordered to write with the help of AI. "Come up with an excuse we can feed to the board of directors about why we fired all the high-paid productive SMEs, lost our most profitable customers and tanked our profits this year".

A version of the paper can be downloaded from SSRN:

Kaniel, Ron and Orlov, Dmitry, Intermediated Asymmetric Information, Compensation, and Career Prospects (February 4, 2020). Available at SSRN: https://ssrn.com/abstract=3532128

see also: discussion of the consulting business model from David Maister’s book Managing the Professional Service Firm

https://commoncog.com/the-consulting-business-model/

In the case of consulting companies like McKinsey, there's another very rational factor: a top performer with a strong ability to climb the corporate ladder might actually be worth less as a consultant than as a director at an external company who would then hire McKinsey. And of course, the partners there have industry connections, to get these to performers hired where they would be likely to generate the best future deals.

Interesting though one would think this is also an obvious finding.

Quantifying this would be interesting though.

What a ridiculous article. The author makes zero mention of politics. In many cases, you are forced to choose the least worst person to fire. Then, politics plays a huge role. If you are the manager forced to choose one (and you have no bad ones), then you choose the one who you like the least (personally). Big investment banks cut roughly 5% of their lowest performers each year. You always can see a few people that should not have been cut, but their politics was too weak to save them.

I've seen this written about before... roughly, after a few years into your corporate career, your job splits into two parts: the skill part (your effort and ability to get stuff done) and the political part (navigating humans in a corporate hierarchy). Say what you like about the political part, for most people, it is unavoidable.

> ... in professions where skill is essential and performance is both visible and attributable to a specific person, particularly in fields such ... fund asset management ...

Laughing out loud)))

Up or out.

Yes, re the gamesmanship on pay, but if you don’t have the specific ability to bring in new business, then you’re on your way out, no matter how good a lawyer (or whatever) you are

TL;DR When workers start out, the firms know a lot more about their abilities than the clients do (they have an "information advantage") as the worker has very few ways through which to prove their abilites. Over time, though, as the employee's public performance increases (through successful cases, good investments, etc.) the information advantage the firm has becomes lower. Eventually, the firm lets the employee go in order because the worker now has proof of their competencies that they can show to clients to demand higher wages directly.

Thanks for the article - that was an interesting read. A creative take that I see some merit in

Every generation since WW2, American management gets dumber and dumber.

Was this written by one of the firms trying to justify the practice?

Too expensive for customers, can't be put on project sheet

Was at a firm with a up-or-out policy. It doesn't sound like author has much real world experience with what they're studying...

The really good people have leverage so the can stay or go as they please. Meaning the people that get hit are average-ish (in the context of firm, not wider market). People good enough to make it to middle management but no further. You don't need to fire them either - they catch the drift when they don't get promoted, and those too stupid to notice were never "good".

>“Firms now essentially can threaten the remaining employees: ‘Look, I can let you go, and everybody’s going to think that you’re the worst in the pool. If you want me not to let you go, you need to accept below market wages,’” says Kaniel.

The below market rates are primarily an effect of CV-prestige rather some intricate machiavellian mind game. People tolerate it because "I was a senior role at X" has value long after you left.

Evil

What a weird take. It's good for the employee to get fired because then the company doesn't have to pay them competitively?

[dead]

[dead]

My favorite example of why managers fire good workers:

- You are a manager of a team of 4

- You hear layoffs are coming

- You have one amazing direct report, 2 just ok and 1 awful

Who do you fire?

Most people say "Of course, fire the awful person"

I say: "When this actually happened, the manager fired their best person"

Other: "But, but why? That's not fair!"

Me: "You know layoffs are coming. You are the most expensive person on the team. If you fire the awful person there may be questions about why you even hired them. They then fire you and keep your amazing person as the manager (probably for less money).

You fire your best person, well then now you as the manager are the best person AND you can make the argument that that awful person needs 'more managing to be effective'"

It's not pretty or noble or heartwarming but this is how the logic goes in a lot of big firms (especially around layoff season).