The Hindu Business Line : Tournament of ESOPs

Why is office life so frustrating? Why do your colleagues stab you in the back while your boss is paid a fortune for lounging around? And why does your undoubted talents go unrewarded?

Tim Harford of ‘The Undercover Economist’ fame has answers to these and more questions in ‘The Logic of Life: Uncovering the new economics of everything’ ( www.landmarkonthenet.com). He argues that rational behaviour is much more widespread than you would expect and that it crops up in the most unexpected places.

More importantly, the economists’ faith in rationality produces real insight, declares Harford. “If you do not understand the rational choices that underlie much of our behaviour, you cannot understand the world in which we live.”

Returning to the office woes, his contention is that the root cause is the lack of info. “To run a company perfectly you would need to have information about who is talented, who is honest and who is hardworking, and pay them accordingly. But much of this vital information is inherently hard to uncover or act upon. So it is hard to pay people as much or as little as they truly deserve.”

A way around this problem is the ‘tournament theory’, which propounds that people are to be paid for relative performance, and the reward is in the form of a bonus or some such. Ed Lazear, one of the creators of the theory comments: “The salary of the vice president acts not so much as motivation for the vice president as it does as motivation for the assistant vice presidents.” While there can be bizarre effects of ‘tournaments’ at workplace, the theory gives a satisfying explanation for why the overall level of CEO pay might be so stratospheric, with an ample dose of stock options thrown in, reasons Harford.

It may seem to make good economic sense that CEOs are given a lot of stock options to stop them from ripping off the shareholders, he proposes. And, adds, in the same breath: “But there’s another possibility that will not have escaped the sceptical reader: perhaps CEOs have ripped off the shareholders, and the stock options are their ill-gotten gains.”

Intrigues at every turn, to match a fast-paced thriller.

When we fail

Forgetfulness plagues us at the most inconvenient and embarrassing moments, cautions Cathryn Jakobson Ramin in ‘That Memory Book’ ( www.virago.co.uk ). Among the examples she cites are of people who left their ATM card in the cash machines more than once, and those trying to desperately remember the security code they’d punched in for a decade.

“Forgetting what you intended to say in a meeting or finding it impossible to hang on to information is frustrating, but in terms of making you wonder if you’re losing your marbles nothing compares to forgetting to do something you promised to do for someone else,” says Ramin.

The worst part can be the rising sense that something is wrong, she warns. “It comes upon you like flood waters: only seconds elapse between the time you notice that the basement floor is wet and the moment that you are up to your neck in remorse.” That can remind traders of how charts can suddenly be a splash of red!

Important read.
Research-based investment

One of the chapters in ‘Sugar in Milk’ by Bakhtiar K. Dadabhoy ( www.rupapublications.com) is about Ardeshir Darabshaw Shroff (1899-1965), the titan of Indian finance. “Shroff had a phenomenal memory and had the names and portfolios of at least 250 clients stored in his memory,” narrates the author. “Any new transactio n would immediately be filed away till it was time to advise the client once again.”

Shroff was an expert at reading balance sheets, but he warned people against too much dependence on them because they were the pictures of a particular day. How did he make his investments? He would visit the factories and do a detailed research before making investment decisions, writes Dadabhoy. See the man behind the project and not just the project, Shroff used to urge.

“Shroff’s analysis of market trends and stocks in a weekly bulletin published by Batlivala and Karani in 1933 was highly popular. His analysis extended to the London and American markets as well,” the book recounts.

Recommended addition to the investors’ shelf for frequent reference.
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