Tournament Theory of Executive Compensation

The recent post on “rank and yank” produced a great comment and a link to a brilliant article from Ganesh which is worth reading to gather some insights on this subject. Meanwhile, i received a link to a superb article in the Forbes Magazine “the tournament theory of executive compensation” <Via Vijayakumar Hariraj> which throws more light on how compensation systems are designed. Excerpt:

The economists Edward Lazear (recently appointed to chair the Council
of Economic Advisors) and the late Sherwin Rosen argued, in a hugely
influential paper published 25 years ago, that tournaments are an
integral and often invisible part of the workplace. Workers are
frequently ranked relative to each other and promoted not for being
good at their jobs but for being better than their rivals. It is a
natural response to the difficulty of true performance pay.

Overall, the compensation and promotion systems at corporations are designed to create a highly competitive environment whose effects only time can tell. Without realizing the impact of these systems, we run program after program trying to improve collaboration and then lament the lack of collaboration! Technorati Tags: ,