Income inequality: Is what’s good for the NBA good for your company?
On the business pages, columnists are writing about income inequality. On the sports pages, they’re discussing the labor economics of the National Basketball Association. Here at the Pink Blog, we can do both.
Take a look at this chart of the 50 highest paid NBA players. These guys make a lot of money – practically CEO money! — and they mostly deserve it. (Well, not you, Gilbert Arenas).
But not all players collect that kind of dough. For every Elton Brand getting $17 million per year, there’s a teammate like Jodie Meeks earning $884,000.
Shouldn’t that kind of inequality — Brand makes 19 times what Meeks does — breed resentment and hurt team performance?
Back in 1999, economist Craig Depken looked at wage disparity within major league baseball and found that, “high total salary levels improve team performance and great wage disparity reduces team performance.” Teams that paid more equally performed better. Would the same be true of basketball?
Nir Halevy of Stanford and Adam Galinsky, Keith Murnighan, and Eileen Chou of Northwestern reasoned that hoops was different from baseball. Because basketball requires greater and more constant in-game coordination and cooperation, they suspected that team success in this sport depended on a more hierarchical system — one or two Kobes or Lebrons and a cast of supporting players.
To test their theory, they crunched pay and playing time data from 11 recent NBA seasons. It turned out that teams with “stars” – players who received mega-paychecks and were consistently in the starting line-up – performed better and showed more indicators of cooperation and coordination (e.g., assists) than more egalitarian teams.
In a press release, Galinsky explained why he thinks the star system works: “In a team environment where players are dependent on each other, they may see hierarchy as both legitimate and fair, which is likely to make the hierarchy function effectively.”
There may be another factor at play here. Unlike salaries in most organizations, NBA salaries are highly publicized and publicly available. The transparency of the system means the star is as accountable to his teammates as they are to him and proportionally more responsible for the team’s success.
All of which raises some questions. Are large companies more like the Miami Heat or the Miami Marlins? That is, do they work better as star-dominated hierarchies or clusters of independent performers? And depending on your answer, does that inevitably mean that either (a) executive pay should be more transparent or (b) corporate pay disparities should be less outrageous?
Very interesting perspective. I have been considering the inequities between the players rate of inflation and the general population in my Blog at http://wp.me/p13dLG-3e.
There must be a tipping point where the supporting cast withdraw their support.
Interesting indeed
I have personal experience from the inside of a company (my current employer Sweden-based Omegapoint AB) which has both (a) *and* (b): Salary structure is pretty flat, and every month there is a spreadsheet on our file-share with this month’s salaries.
It is hard to tell what is cause, and what is effect, but the company culture is very much about openness and helping out.
Could be an interesting case study (not that I am in any position to promise a such 😉
Yours
Dan
There’s a couple of ways to look at this. I think corporations are more like the Miami Heat (Go Heat!) That’s because hierarchies are inherent as different team members contribute varying degrees of value.
However, I would argue that many executives are earning more and more and they’re getting away with not producing and yielding commensurate results. It’s almost as if a privileged class is on the rise and success is determined more by membership and less by productivity and accountability (e.g. Gilbert Arenas).
That’s the biggest problem.
I think it’s healthier to be open about this reality because people already understand it. If someone can deliver more value, then they deserve more compensation. People don’t dispute that. The problem is when those stars aren’t held accountable and when there is no opportunity for regular people at a company to increase their skills and exercise more of their talents in order to contribute more. In other words, to get a fair chance to get more playing time and prove what they can do.
We should open up paths to allow people to contribute and produce more, should that be their wish and should their talents be enough to take them there.
AS I read this I was thinking about your book “Drive”; it’s not compensation but autonomy, improvement and purpose that drive performance. If it’s essential that an organization/team can’t allow autonomy in order to perform well, then maybe the person(s) responsible for the team’s performmance should gets a higher salary- even alot higher. However, most corporations need employees who can act autonomously and each employee is held accountable for his/her results. This would suggest that too much income desparity would create resentment and a desire to push accountability up the heiarchy to those who are being highly compensated.
I guess the other issue is whether you want a star player (or CEO) focused on their own stats (or #’s – short term gains) in order to prove their worth. I was just reading a bit about this in Carol Dweck’s book Mindset.
One question regarding the end of Daniel’s article. Who says the execs are the stars? Shouldn’t a star employee also receive better than average pay? Very often execs and managers consider only themselves for star-status payouts and consider egalitarian means as better for “regular” employees.
In baseball, we measure “errors” (counting the negatives of individual performance). The structure of this would seem to divide players.
In basketball, we measure “assists” (counting the positives of cooperative performance). The structure of this would seem to unite players.
Ok, let’s imagine the star player starts missing baskets, and fumbling the ball. ONe would imagine that team morale would suffer a lot more than in a more egalitarian team.
As for CEOs who continue to be paid “performance” bonuses when they are clearly not performing, well, how long before their “supporting cast” (the shareholders) join Occupy Wall Street.
You have me thinking 😉
An extra $1000 feels good… until you realise that everyone else got $2000. It is always so much about perception.
If I perceive that the others have “earnt” more than me, then I am less angry. If I cannot see what the reason is… even if there is a very good reason… then I am resentful. Not good for me, them or the world.
With perfect timing, the High Pay Commission has just released its report into UK corporate pay:
http://highpaycommission.co.uk/wp-content/uploads/2011/11/HPC_final_report_WEB.pdf