A Nobel Prize winner complains about me

Posted by Marc Hodak on October 15, 2016 under Economics, Executive compensation, Governance | Be the First to Comment

Bengt Holmstrom, a co-winner of the 2016 Nobel Economics Prize, rails against the complexity of executive pay. He’s right about that. He blames compensation consultants, but that is attacking a symptom, not a cause. The underlying cause is the proliferating regulation—formal and informal—of compensation governance. This regulation creates constraints on how Boards can design executive compensation programs. Boards rationally react to those constraints by building plans of ever-greater complexity.

The source of compensation regulations is popular disdain for high CEO pay. The intent of the regulations is to tamp down that pay, but that’s like putting nails in a board to stop a marble from rolling down. You don’t stop the marble; you just make its path more complicated.

Nevertheless, Prof. Holmstrom is a worthy scholar, one whose research has done much to inform my discipline, even if unfortunately few practitioners have actually heard of him, or heeded his conclusions.