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article imageEconomics Nobelist Holmstrom: CEO pay 'just a mess'

By AFP     Oct 10, 2016 in Business

Bengt Holmstrom, the Finnish economist whose contract theory research earned him a Nobel economics prize Monday, said that executive compensation has gotten out of hand, and contributed to the collapse of Enron Corp.

Holmstrom, who shared the Nobel with fellow economist Oliver Hart, explored the way employment contracts can shape behavior and reach mutually beneficial outcomes for the hirer and hiree.

But he told an audience Monday at the Massachusetts Institute of Technology where he now works, that their research hasn't always gotten through to those who design pay packages.

"I was on the Nokia board for two or three years. And I think executive compensation went from reasonable to absolutely dreadful," he said, pointing to stock and option incentives given management.

Likewise, he said, the collapse of Enron, the high-flying energy company that failed in 2001, related to executives' pay deals, with generous stock options, that did not align their interests with the company's.

"I think the main problem with that scheme was that they were not vested, that executives could cash out very quickly," he said.

He told journalists that executive pay had gotten too complicated. "There's so many pieces of it and it's just a mess... I wish they would listen a little bit more about what we know or understand about executive compensation."

Holmstrom, 67, said he was delighted to receive the Nobel. He and Hart will share the eight million kronor ($924,000) prize.

"I feel dazed.... I am still wondering whether I will wake up or not."

He described himself as "lucky" for having gotten into a research topic just at the time it was garnering broader interest, "for being in the right place at the right time."

But he was not ready to offer a prescription on how pay should be decided, saying it is difficult to fiddle with the power of the market.

"Economics doesn't really have an opinion on the level" of pay, or why CEO pay has soared in recent years, he noted. "It is what it is. It is somehow demand and supply working its magic."

After years of working on theoretical topics, Holmstrom said he was now thinking about real-world issues.

"In the last six years, since the financial crisis, have been intellectually very rewarding."

"I'm back into the mode of really thinking about problems, which you can lie in bed and wake up at night and feel excited about."

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