OBSERVATIONS ABOUT SETTLEMENT NEGOTIATION

This Sunday’s New York Times discusses strategies regarding the Bush tax cuts which are set to expire at years end in an article by Robert H. Frank entitled: “In talks, G.O.P. May  have to just say yes.” He first references the book “Getting to yes,” by Robert Fisher and William Yuri where they discussed the concept of knowing the best alternative to a negotiated agreement or “BATNA” during negotiation. They argue that knowing your and your adversaries best alternative to a negotiated agreement is essential in negotiations.

Frank points out that when Warner Bros. filmed the 1999 hit comedy “Analyze This” it was based around a common passion of a mob  boss patient and his psychiatrist for the recordings of Tony Bennett. The film was to conclude with Bennett actually singing in the closing scene. However Frank points out that the studio didn’t bother to approach Bennett until the film was almost completed.  By then his singing was an integral part of the plot of the film. When they offered $15,000 to Bennett to sing in the closing scene the singers business manager reasoned that they had already shot the whole film around the ending and held out for more. As a result instead of paying $15,000 they paid Tony Bennett $200,000 for brief cameo appearance.

The studio executives had made a fatal mistake by not negotiating the amount  before starting to make the film. Had they done so and Bennett demanded an unreasonable amount, they could have easily rewritten the script to use some other singer.  However at the end of filming Warner Brothers  best alternative to a negotiated agreement was to spend hundreds of thousands of dollars to avoid reshooting the film. Consequently they paid an extraordinarily large amount to avoid that alternative.

Frank applies the same concept to the negotiations between Pres. Obama and congressional Republicans. The Republicans want to keep tax rates the same while raising revenue through closing “tax loopholes..” The president however wants to restore a 39.6% top tax rate for families earning more than $250,000 while maintaining current rates for everybody else. Republicans are in the same position , according to Frank, as that confronted Warner Bros. That’s because both sides know that the failure to reach an agreement would be far more costly  to the Republicans than to the president.  It would mean the expiration of the Bush tax cuts which Republicans desperately want to avoid. While neither side wants the tax rates to revert to those in effect when Pres. Bill Clinton left office ,  the president has the more powerful position in the negotiations given BATNA

Frank also notes that opinion polls suggest most voters would blame the Republicans if negotiations break down.  That means Republicans should prefer to reach the agreement now rather than after it happens just like the situation for Warner Brothers.

The lesson for us, in part, is timing. The power can shift quickly over time and recognizing the best time to compromise is very important.  That’s probably why most good settlements occur close to or even during trial. Another lesson is that dealing with the concept of “BATNA.” Correctly analyzing both sides positions should yield the limits for compromise as well as the power structure of the parties. Admittedly these are  very basic ideas, but valuable nevertheless.

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