Here’s a youtube clip that I came across last night:
Here’s why I think it’s interesting:
- One of the co-winners of the 2016 Nobel Prize for Economics was Bengt Holmström.
- As you can read here, Mr Holmström was recognised for his work on contracts. Specifically:
- realising that fixed salaries don’t do enough to reward performance; then
- realising that standard bonuses don’t always do enough to incentivise performance; then
- realising that performance incentives can result in standard work tasks going undone (because there’s no reward linked to it).
- With that in mind, I want to go back to the youtube clip, which explicitly draws a link between rising CEO salaries and the introduction of stock options as part of executive remuneration packages.
- The problem is: while stock options were becoming a standard form of compensation for executives in the 1990s, the stock market itself was growing. There were share price bubbles and IPO booms – all of which pushed up the value of most compensation in the form of stock options.
- That is: the rising wave of equity prices has been quietly re-benchmarking CEO compensation packages for the last two decades.
- In order to…’incentivise performance’.
So if you’re looking for a scapegoat for all the salary-disparity, can I recommend a freshly-minted Nobel prize-winner for your consideration?
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.