Owner-Employee Compensation Game

Abstract

A firm typically consists of an owner and capital provider plus key employees who together can create surplus value above individual outside opportunities. Our research approach is to model the firm as a cooperative game across these individual players with specific attention to the core and Shapley value. In our model, Shapley value splits surplus value 50 - 50 between the owner and the group of key employees. This seems intuitively fair but it is not dominant over other allocations in the core, particularly all surplus to the owner and all surplus to the employees. This is a recurring theme in cooperative game theory: Shapley value is a standard of distribution fairness but it is usually not uniquely dominant over other core solutions.