Gift Giving

The New York time’s article “How to Get the Rich to Share the Marbles” shed’s light on the phycology behind gift giving and sharing rewards.  Applying the information gained from the article to an organization or team production could be extremely useful. The idea is that verbiage emphasizing competition, “to each their own”, or “eat what you kill” may not be the best way to curb wealth inequality in America. The study found that when children work together and feel as though they are working towards a common goal they are much more inclined to share the reward, more so than if they were just given an unequal amount of the reward. One might take this information and say that organizations should focus more on team building and striving to meet a common goal rather having an “every man for him” mentality in the work place. As we learned in class, employers do their best to create incentives or give gifts to works to help increase productivity. In an ideal situation, the incentive or gifts perfectly align giving the worker that much more motivation to do the task well. Thinking of the classroom as an organization, the gift Professor Arvan gave us to motivate us to do better on the next exam was 25 points. In class he made us feel as though we were working together, with his help, to achieve the 3 goals we talked about on the first day. This shows that the phycology behind working together to achieve something goes further than simply giving people more points so they can individualistically achieve their desired course grade.

 

I will attempt to apply this framework to an experience I saw this summer at William Blair, first some background: For a long time investment banking was all about receiving a very high end of the year bonus, which varies from employee to employee based on their contributions to the firm. This created an environment where everyone competed against each other to receive the highest bonus. To add more color, these bonuses do not stem from how much revenue you generate for the firm, but are an attempt to quantify how hard you worked during the year usually measurable in terms of how many hours you were in the office. This is important to note because unlike selling stocks or trading, in M&A you are constantly working in a team and you really need to help one another to complete a deal. The competition became so high that the firm was actually losing productivity as people were less inclined to help one another. 

 

This past year the industry has undergone a huge transition. Most investment banks are trying to create a more collaborative environment and are changing the compensation structure. The banks are raising base pay, preventing analysts from working 7 days a week and are monitoring management to make sure the competitive culture is changing. In other words, the banks is gift giving by letting analysts have more free time and less “face time” and rewarding them with higher base salaries to decrease focus on winning that big bonus. They hope this new system will encourage analysts to lend a hand to a coworker even if they won’t get recognized for it or cover for another employee if they are feeling ill. This is much more beneficial for closing deals compared to the “eat what you kill culture” This example has many moving pieces and was simplified to make sure readers from all backgrounds can grasp the main concept. 

Income Protection

I’ve spent the last four years of college accumulating a series of learning experiences to prepare me for entry to the job market upon graduation. In high school I took part in business and economics related competitions, which prompted me to elect economics as my major at UIUC. Although I was fortunate enough to have my parents pay for college, tuition price and the average starting salary of economics majors really influenced my decision making process. My goal was to make the most out of my parent’s generosity while aiming to receive a job with a high enough starting salary that would allow me to be independent from my parents. I’ve spent the past three summers working in finance/economics related internships to help improve my chances of winning a great full time job offer. I spent one summer working in personal wealth management and insurance planning which taught me a lot of valuable lessons regarding income protection and the various methods people use to determine how much money they need to save or budget for their monthly expenses. I also spent two summers working in mergers and acquisitions, which is where I would like to start my career.

Knowing something about income protection and roughly the starting compensation of an investment banking analyst I’ve started to create my budget and saving plan. Although there is no one close to me personally who has already gone through this process, I had the opportunity to pick the brains of the other analysts I worked with to learn more about their income protection process. I plan to purchase workers compensation insurance, save roughly 20% of my income and max out my yearly 401k compensation. I want to be in a position to support myself for at least a year in case I am laid off from work and make a habit out of saving for retirement. I currently do not have much savings; I’ve been fortunate enough to do a lot of traveling while in college. I do hold an on campus-teaching job, which helps pay for my day-to-day expenses.

I recently accepted a full time job offer and have already started to think about what job I will pursue next. I hope of taking what I’ve learned about preparing and building my learning experiences will guide me to my next opportunity. I am extremely interested in private equity and will likely try to read about the industry and network as much as possible over the next two years. I also plan to had another layer of income or job protection by taking the GMAT next semester. If I get laid off or cannot find a second job I will take out a loan and go to business school to rebrand myself and improve prospects. Although this is a huge cost in the short run, I think in the long run this will provide me with more opportunities in the future.

Illini Bucks

Introducing Illini bucks to campus would certainly create an interesting array of opportunities for students to illustrate which services, activities, events or goods they preference. If I understand correctly, the hypothetical situation introduced in the prompt gives each student an equal number of “Illini bucks” at the bringing of the semester. Before spending this campus currency, students would already have an understanding of how much each illini buck can purchase on campus. For example, maybe students can use these bucks to get in the front of the line for access to sporting events, concerts, registering for classes, interviews, library tables, gym lockers etc. It seems as though the potential uses are endless.

There are many aspects of everyday campus life that I wish I could simply, “cut in line”, some of which I mentioned above. We learn in economics that each person has his or her own set of preferences, which makes up an indifference curve and influences their spending habits. All things being equal, and there being no seniority for picking classes based on credit hours, I would choose to spend my illini bucks on picking classes before others. I personally think tuition is meant to purchase education and using this imaginary currency, paid for by my tuition, to increase my learning experience would provide me with the most utility. It is known, that many of the best, interesting, even “easiest” classes fill up first during registration. Those who have the most credit hours in their respective class have the opportunity to pick courses that will, in theory, give them the best educational advantage. There has been many instances where I would (not literally) wish to pay someone just to save me a spot in a highly regarded course.  We mentioned in class that there are many ways other schools across the nation allow students to choose courses; I think introducing illini bucks would greatly change that process here on campus.

However, not everyone shares the same preferences. I know many friends who would rather choose to spend their Illini bucks on getting first picks for basketball season tickets, or the best parking spots on campus.  I cannot say what percentage of students would apply their currency to educational vs recreational benefits, though it would be an interesting study. I have to imagine that the majority of students would choose to use the currency on registration, tutoring session, job fairs, etc. After all, this is the reason why we go to school.  Pricing all these options out would be an interesting process.

Quite frankly, I think it would be impossible to set an effective fixed pricing scheme for illini buck purchases. I don’t see an efficient situation where the campus government could accurately determine the preferences of the entire campus and as a result set prices on a supply/demand basis. If prices are set too low, disproportionate to demand, students will end up still entering a first come first serve basis system as the services in high demand will have long lines with people wanting to spend their bucks first. If prices are too high, then students, I assume, will end up spending the majority of their bucks on educational related services, while all other services continue to operate on a first come first service basis as people deplete their funds.

I think this fixed price system would result in a secondary market for educational and recreational related services. As people change preferences throughout the semester I would expect prices to fluctuate and people willing to either exchange real money, or illini bucks for services in demand.

Running the Deal Team

This past summer I interned in William Blair’s healthcare investment banking group. My role was to help execute M&A, IPOs and debt offering transactions for companies that operate within the broad spectrum of the healthcare industry (ex. medical devices, hospitals and other healthcare related services) . More specifically, as an analyst I conducted routine financial analysis, prepared marketing materials and sat in on client meetings. In addition to these main categories of responsiblilites, I was also given one-off projects from other members of the deal team in order to ease their workload.  Each transaction that took place within the group had a corresponding deal team responsible for execution. William Blair has one of the strongest healthcare teams within investment banking due to the successful structure of their deal teams.

Each deal team consists of a managing director, vice president, associate and analyst. The managing directors role is to bring in clients and convince them to take part in one of the transactions William Blair specializes in. The majority of the workflow stems from the client interactions and is delegated by the managing director to other members of the group. For example, if a client would like to sell their business, the managing director would tell the vice president to speak with the CFO to learn more about the financials, have the associate research potential buyers and the analyst to create an excel model that values the business. There are many tasks to delegate and this is a finite example, however, the main point is that the managing director “runs the show” and the team is focused on getting the deal done no matter.

This basic hierarchy proved successful time and time again.  The simple structure allowed the managing director to easily and effectively communicate orders downward. Each task and step in the process aimed to close the deal. The younger members of the team have immense respect for the managing director and have the opportunity to earn income based on the deals the “MD” sources. The MD really made the team feel as though they had a greater sense of purpose, having direct impact on the financial markets and helping to improve products/services that help improve peoples lives. The team rallied around this concept to not only complete the deal, but to also go above and beyond to provide quality work.

In some instances the deal team exhibited a dual authority structure. The Vice President strives to become a managing director. In order to do this, the VP will attempt to source his or her own deals and practice “running the show” or taking command of the deal team to complete a transaction. Everyone in the team is constantly learning news skills and working with other members to improve.  In these circumstances the MD will help guide the VP and help him or her improve client facing, negotiation and sales techniques. In my experience, this situation was very rare and more often than not the VP would learn these skills through practice, rather than sourcing the deals themselves.

In terms of the channel or network structure, it was generally the associate’s task to make sure all the junior level work was being completed. There was a strong sense of communication and accountability between members. Everyone trusted that their individual tasks would be completed and not let anyone else down.

The structure of our deal team encompassed many of the core aspects that Katzenbach and Smith and Bolman and Deals spoke too. The sense of direction and motivation stemming from the MD shaped the group to take advantages of opportunities in their path. This common purpose helped members develop their professional careers and earn an income.  Each step was outlined in detail in order to ensure a high level of accuracy in completion. The size of the deal teams created strong bonds amongst teammates and fostered communication. 

I had a great experience this summer and truly learned the art of managing a successful team. These core characteristics can be applied in many group settings and I believe the reading showed that different structures work better in some situations vs. others. When a group creates a proper structure and works towards a common goal, great things happen. This summer I saw the completion of two IPOs and four acquisitions, it was great seeing all the teams hard work pay off.   

Opportunism

Speaking generally, I think most people think about opportunism in two ways. The positive side, ceasing the day if you will, regards to being in the right place at the right time to capitalize on a business venture or other chain of events that puts you ahead in achieving your goals or benefiting in some way. This closely correlates with “Chance favors the prepared mind” or, in other words, opportunity will come eventually if you keep seeking. The other side of opportunism usually is unethical, like the professor mentioned in the prompt, this maybe looting after a power outage, taking a lost wallet or anything else along those lines. I think the key difference is that we as a society view one type of opportunity as deserved and the other as stolen. In a sense, the latter example leaves a victim while the business example may not. 

Situations like the hold up problem cross into a grey area. Although “business is business” most people find it inherently difficult or uncomfortable to take advantage of a situation just because you have more bargaining power over another party. For example, from an economics perspective it would make sense to sell a dehydrated person in the desert a bottle of water at an extremely high price (supply/demand) but from a moral perspective we would find that situation grotesque. Although that is an extreme example, one starts to find the spectrum of examples increasingly difficult to judge a situation as moral or immoral. In contract negotiation we as a society would say each representative wants to win the best contract agreement for their client or company. At the end of the day these parties are concerned with the bottom line. In this same light, taking on a macro perspective, society does tend to have a problem with opportunism from the corporate perspective. Whether a company takes advantage of tax laws, subsidiaries, legislation lobbying, minimum wage etc. the general public gets very angry. Even though all these actions are in the confines of the law people still think corporate opportunism is wrong and should inherently operate fairly. For this example I think people would rather have corporations willingly pay taxes to help the public, increase wages to benefit lower income earners, reject government subsidiaries etc.

I have been in several situations where I could have benefited from opportunism. From an unethical perspective, I distinctively remember a time in 8^th grade when a student lost his wallet and a friend of mine found it. No one would have known if we took the money and left the wallet behind.  We probably could have bought a new video game, but instead decided to return the wallet. To this day I am still unsure of our motivation, but it was a combination of guilt and putting ourselves in the other person’s shoes. I remember thinking that if I lost my wallet, I hope someone would return mine. This resembles to “Good Citizen” feeling noted in the prompt. In another situation I was working on a case competition to analyze a merger between two oil and gas companies. The material was very difficult due to lengthy industry jargon. The competition had a long set of rules, however no where did it say we could not contact industry experts to ask about the case. Although I knew this wasn’t “fair” and others would likely not take this approach I decided to cold call oil and gas analysts to ask their opinion about the merger. They were extremely responsive and as a result our group took first place in the competition.  We didn’t feel any remorse for acting opportunistically because we were in the confines of the rules and we didn’t personally hurt anyone. For me, I think that last point is key. I would act opportunistically if no one were harmed in the process.

Transaction Costs within Organizations

I have been apart of many organizations on campus ranging from groups focused on investments to non-profit work.  Some of these organizations are over a hundred years old and others I have personally founded and structured based on other successful organizations. My business fraternity and social fraternity have strict guidelines, internal chain of command and decision-making processes that have been passed down for decades. I recently co-funded the investment management academy (IMA) through the college of business, which is designed to help students learn about portfolio management and ultimately break into the asset management industry. Still in the early stages, there is a lot of flexibility to change policies and direction as needed. Starting this organization was not easy and required a lot of “Social capital”, one might say the initial transaction costs revolved around politically motivating the necessary channels to issue support and approval for the group. As time has gone on and traction has increased the transaction costs have decreased as we find it easier to set up events, recruit new members and take on new initiatives. In contrast, my business fraternity has extremely low transaction costs as economies of scale and time has helped make the organization more efficient. I’ve found that transaction costs, or using social capital, is very similar when describing how businesses operate externally in terms of dollars and cents. I am interested to see how we expand upon this topic in class.

Christina Romer's Brief Biography

Christina Romer was a former Chair on the Council of Economic Advisers to the Obama administration. She has had many accomplishments in her life including helping to draft a recovery plan for the 2008 recession, having her details for job reform presented before congress.

Born in Illinois, Christina later went on to earn her Ph.d in economics at M.I.T. She has been involved in countless economics organizations and has spent time researching macroeconomic activity before WW2, causes of the great depression and impact of the "New Deal".  Some of Christina's recent work has focused on tax reform and effects on economic growth.