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