Sunday, July 4, 2010

Tennis Tournament Theory of Management Salaries

I just stumbled upon the prize money table at Wimbledon. The winner gets one million pounds sterling. The runner up gets 1/2 million. The 64 first round losers get £11'250 each and the 32 second round losers get £18'750 each. In total, those 96 losers earn £1.32 million. So the two finalists earn more than the 96 losers competitors in the first rounds together. Furthermore, the increase over 2009 was 17.6% for the top 16 players, but only 4.7% to 6.8% for losers of the first three rounds.

Wow.

Are there any similarities to pay scales withing companies? Actually, I think I know the answer to this one. More interestingly, given that corporate pay scales do look like tennis tournament prize winnings, what effects does this have on cooperation and teamwork within the company, especially at the levels of top management or between the departments of the "Quarter-finalists"?

3 comments:

Anonymous said...

This is already fairly well covered.
Even wiki has an entry: http://en.wikipedia.org/wiki/Executive_pay

Peter said...

Hi Anonymous,

From the perspective of executive pay, I agree. My source was Tim Harford, author of The Undercover Economist.

The (not universally accepted) conclusion of tennis tournament theory is that doesn't matter what the CEO actually does; his salary is a motivator for the rest of the company to do their best.

Note that I don't say motivates the team to do its best, because this theory implies that everyone below the CEO is a competitor to each other.

I don't have any opinion on its validity to CEO salaries. I am however convince that it explains the behavior of the "quarter-finalists" beautifully.

Peter said...

BTW - the World cup has a much flatter distribution curve:

$8 million – To each team exiting after the group stage (16 teams)

$9 million – To each team exiting after the round of 16 (8 teams)

$14 million – To each team exiting after the quarter-finals (4 teams)

$18 million – Fourth placed team

$20 million – Third placed team

$24 million – Runner up

$30 million – Winner

Why is the treatment of soccer teams more egalitarian than of tennis players?