Wednesday, 24 July 2013

Now this is just stupid 2

A reading of Henry Hansmann's 1996 book "The Ownership of Enterprise" may be worthwhile for Geoff Bertram. When discussing the Spanish cooperative Mondragon Hansmann writes,
The wage structure has been among the most contentious issues at Mondragon. Initially, the systemwide top pay index-the maximum permissible ratio of highest to lowest rate of pay-was three to one. Over the years, this ratio has been increased to attract and hold talented executives.
Hansmann notes that the ratio had been increased to 4.5 to 1 and then to 6 to 1 in a effort to keep good managers.

A firm with a very constrained  pay scale will not be able to keep its "best and brightest". I used this basic argument in a paper to help explain why you don't see player-owned teams in professional sport,
Another (more usual) example of a human-capital based "firm", but one where labour-owned firms are seldom, if ever, found, due to the heterogeneity of the human-capital involved, is that of the professional sports team. Here we have a situation where human capital, talent at playing a particular sport, is the basis for the “firm” but ownership by the human capital, the players, is extremely rare since a worker-owned team would be at a disadvantage relative to a player-as-employee based team.

Heterogeneity among playing talent and thus earning potential acts as a disincentive to the formation of a worker cooperative, which involves (rough) equality in payment, since those players with the greatest earning potential, the largest outside options, will transfer away from the cooperative to maximise their income stream. Differential payment schemes can occur, especially within partnerships, but they require that the individual employee productivities are sufficiently easy to measure so that a relatively objective method of productivity related pay is possible. Given the team production nature of team sports productivities are difficult, if not impossible, to estimate and thus payment by productivity is not feasible, which argues in favour of equality in payments. Thus a worker-owned team would have few, if any, star players, a handicap in the winner-takes-all world of professional sports.

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