With the US Open Championship of tennis in full swing, its a good time to visit some wisdom drawn from the sport, e.g. the Tournament Theory! I stumbled across this in a post today by Tim Harford, the author of The Undercover Economist:
It should go without saying – but never does – that your boss is overpaid and underworked, while you and your colleagues toil long hours for peanuts. But beyond the fact that life is cruel, is there a rational explanation for this?
An economist called Ed Lazear has one. He noticed that in a sporting tournament – say, Wimbledon – players are paid for winning rather than for trying.
But they try anyway.
Lazear thinks the same is true of office life. Nobody thinks that Roger Federer’s cheque at Wimbledon is supposed to be his payment for turning up at the next tennis match. They realise it’s a reward for his past victories and a motivation for every other player to go away and practise, so that next year they will play better.
Your boss’s easy lifestyle and “fat cat” salary are just the same. They are not supposed to be a motivation for him, they are supposed to be a motivation for you and me and all the other workers who are struggling to get to the top of the heap. In fact, the more egregious his salary the more hard work it should squeeze out of everyone else who wants it.
The ideas were formalized by Edward Lazear and Sherwin Rosen in a paper in 1981. Subsequently the field has expanded and there is empirical data which agrees enough, that it is being accepted as an explanation for the general trend of high senior executive pay.
At the same time it all seems counter intuitive since one could argue that there are proper theories et al for determining incentives etc.
Practically though there’s no escaping this tournament, each day being just another round.