Monday, April 03, 2006

A Stock Market for Ideas

A persistent challenge facing corporate America is maintaining a reward system that inspires employees to engage in value-adding behavior. Economic theory suggests this is accomplished by aligning employees’ incentives with the company’s incentives, but the best way of aligning incentives is not always clear. Thus, firms are challenged to design systems that link employee productivity to the company’s well-being, and ultimately to financial incentives for the employees. Anyone who has seen Office Space or The Office knows what can happen when worker productivity isn’t being harnessed and directed.

A New York Times article tells how Rite-Solutions, a Rhode Island-based software company, came up with a unique solution: Mutual Fun, a unique internal “stock market” for their employees to play in. Instead of trading stocks, employees trade ideas. Ideas are submitted and assigned stock ticker symbols. Initial prices are set at $10, but from there it is up to employees to make the market. Popular ideas will attract buyers and that stock’s price will rise. Conversely, ideas failing to garner support will decline in value.

Like real stock markets, supply and demand rules in the Mutual Fun. Ideas are supposed to benefit the firm, and to make sure employees have the proper incentives, Rite-Solutions ties monetary rewards to high-performing portfolios. In other words, employees putting their support behind successful ideas are rewarded for spurring the firm into action.

While most companies operate assuming that big ideas come only from the top, Rite-Solutions co-founder James Lavoie notes, “At most companies, especially technology companies, the most brilliant insights tend to come from people other than senior management. So we created a marketplace to harvest collective genius."

1. What is the most successful stock on Mutual Fun?

2. How might Rite Solutions’ Mutual Fun compare with more traditional methods of issuing stock options or paying bonuses based on current earnings? Consider the difference between short-term and long-term goals.

3. Hopefully employees base trading decisions on some fundamental analysis (which ideas are better) rather than playing the market. How could employees buying underperforming stocks or engaging in herding behavior affect the outcomes of the market?

Topics: Finance, Stock market, Incentive alignment


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