Prestige, Promotion, and Pay
2020
We develop a theory of career paths in financial (or other professional services) firms. In our model, firms optimally design their career paths to “sell” scarce prestigious jobs to a set of qualified candidates. We show that optimal career paths resemble promotion-to-partner structures in which entry-level employees (“associates”) compete for a limited number of better paid and more prestigious positions (“managing directors” or “partners”). Our model shows how the optimal span of control (i.e., the associate-to-partner ratio) is affected by a number of factors, such as job prestige, job productivity, labor market competition, and product market competition. The model also provides a number of new empirical implications relating job prestige to compensation dynamics, employment, inequality within and between generations, and the size of the financial sector.
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