Archive for May 6, 2009

Kathryn Gould

Kathryn Gould is a ‘serious violinist, painter and pilot, and a frivolous boogie boarder’, in her own words. She’s best known for being one of the country’s most accomplished VCs – venture capitalists. She was the employee #10 in Oracle as its first vice president of marketing in 1982, said that “Every CEO I back has to have a little piece of Larry Ellison in him.”

Michael Lewis explained in a layman’s language the difference between VC and IB – investment banker (in 1997), he used Gould as an example, and tennis tournament too:

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The third possible explanation for why Gould is paid tens of millions of dollars to do a job that lots of smart people would do for half as much is the most interesting. It explains equally well (or poorly) the outrageous salaries paid to CEOs and the vast bonuses earned by Wall Street bond traders. It grows out of work done over the past 15 years by a pair of professors at Stanford who live in the shadow of the venture capitalists. Their names are Edward Lazear and Sherwin Rosen. Their theory is called the “tournament theory.”

Put aside the usual question of whether someone is being paid what she is worth. The tournament theory holds that it is sometimes efficient, and in some sense right, to pay people far more than they are worth.

Start with the example of the professional tennis tournament. Players are paid not for their absolute value but for their relative value. If Pete Sampras plays better than Andre Agassi he wins, no matter whether both of them were playing well or playing poorly. So how do you use money to motivate a tennis player? The answer is obvious: Pay the winner more than the loser. The greater the difference between the loser’s paycheck and the winner’s paycheck, the harder the players will try. The only limit is that the loser’s paycheck must be big enough to guarantee that they both show up in the first place.
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