>Dear Armchairists (?),
>
>My M&A advisory company has a few sector teams (in Vienna & London).
>We also have a network of local offices in all the CEE capital cities.
>On a big "Bank" deal, for instance, there will be a local team element, and
>a London sector team element.
>When we get the mandate, it's partly because our expensive London expert
>team is recognized as fine,
>but also because our local team (in Bratislava, for instance), is also
>strong.
>
>Internally we "split" the fees between the two teams -- which is annually
>important for bonuses.
>We are not satisfied with the internal bickering about fee splits and work
>-- on any given mandate, both
>teams (local & expert) believe they could basically "do it all alone".
>
>My top management would like an incentive/accounting system which satisfies
>both teams, and gets both
>teams to cooperate more fully, and to use the advantages of each more fully.
>
>Is there any micro- / game-theory analysis on such internal business
>organization?
>
>Recommendations & suggestions welcomed.
>
>Tom Grey
>CA IB Securities
One interesting possibility is to give each team all the money. This
assumes that the benefit to the firm from the deal is measurable.
Consider a simple case:
Two individuals produce a product; it's total value is a function of
inputs by each. Inputs are not measurable, but total value is. How do
we give each the right incentives?
Say that total value varies, on average, from 0 to $100, average $50.
Each individual puts $25 into a kitty in advance. Each individual
then gets back the full value of the output. Obviously the kitty has
to be held by something like an insurance company, since it is
breaking even only on average.
In your context, this presumably works out as lowering the salaries
paid to your people and increasing the bonus so that total bonus paid
out for a transaction is twice the actual value. Of course, it only
works if their salary is in part paying for something other than such
transactions--otherwise they would have to pay the firm for the
privilege of working there (and getting a shot at the bonuses).
The underlying logic of this approach depends on two facts:
1. Each party makes the optimal investment if, on the margin, he gets
the full benefit from his investment.
2. Marginal doesn't have to equal average.
You can find a different version of the same argument (with negative
payoffs due to auto accidents and the like) in the chapter on torts,
I think pp. 195 and 203-4.
--
David Friedman
Professor of Law
Santa Clara University
[EMAIL PROTECTED]
http://www.daviddfriedman.com/
