In my experience, there are no rules to govern this decision. My point in introducing the subject with IPD and the Press/Dyson result is to say that it’s misleading to use the now-upended superiority of cooperation’ story as a reason for advocating a Woodstock-oriented pay regime. You may think that pay arrangements which fail to inculcate a strong sense of shared fate within your firm will condemn it to dissent and eventual dissolution. But bear in mind that somewhere nearby there is some other firm which, unlike yours, if subjected to a Woodstock pay regime would wind up with a low-energy bunch of sharers while the core of enterprising individualists has moved off.
What is a leader to do?
My answer is to make sure that your pay system has the potential for creating a balance and moving the balance point in response to changing sentiments over time. A principled compensation program that is transparent in inputs, is, I find, the best way to deal with this. “Principled” means explicit in its intentions about individualism and cooperation – as well as the other dimensions of pay.
“Transparent in inputs” means using metrics that link the mechanics of pay determination to the principles. Thus, members possess an explicit understanding about the determinants of pay outcomes, derived from a set of principles. It also means that members periodically receive information about performance across the dimensions of pay determination so that, without an exchange of envy-inducing pay outcomes, members can know how their pay was derived.
—Richard Rapp
For some extracurricular reading about the prisoner’s dilemma:
William Poundstone, Prisoner’s Dilemma (New York, Anchor Books, 1993)
The Prisoner’s Dilemma, Freeman Dyson, Institute for Advanced Study (Fall 2012)
To the Trickster Go the Spoils, Tom Bartlett, Chronicle of Higher Education (September 2012)
Orley C. Ashenfelter, et al., “Lawyers as Agents of the Devil in a Prisoner’s Dilemma Game: Evidence from Long Run Play” National Bureau of Economic Reseearch Working Paper 18834, February 2013
