Equity Pay in Networked Teams

Abstract

Equity compensation is widely used to motivate members of a team, such as a startup, to work toward a common goal. A natural question, about which little is known, is how the structure of collaborations should influence the design of equity compensation. We analyze this problem in a standard quadratic-payoffs network game model of production with heterogeneous complementarities. Each member of the team chooses a level of costly effort. This effort makes a "standalone" contribution to the firm's output, but there are also production complementarities: some pairs of workers generate an output proportional to the product of their efforts. In our model, the pattern of these complementarities is exogenously given and defines a network.