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 now works at MIT shared the Nobel with fellow economist Oliver Hart.
Both explored the way employment contracts can shape behaviour and reach mutually beneficial outcomes for the hirer and hiree.
Moments after the announcement of the Prize, Adam Smith of www.nobelprize.org called Holmstrom for a conversation, with Holmstrom expressing delight winning with Hart, who he describes as his friend.
Read the interview here:
Bengt Holmström: Hello.
Adam Smith: Oh, hello. May I speak to Professor Holmström please?
AS: Ah, this is Adam Smith calling from Nobelprize.org, the official website of the Nobel Prize in Stockholm. Congratulations on the Prize in Economic Sciences.
BH: Yes, thank you.
AS: First of all, you are a Finn but of the Swedish speaking minority population. Does that make it especially meaningful to receive this Swedish prize?
BH: Yes, of course, I mean the Nobel Prize is very special, but being a Finn and a Swedish-speaking Finn, and seeing Stockholm is my second home town, you know, it’s very special for me. My family, a big part of my family lives there.
AS: How did you actually hear the news this morning?
BH: Yeah, I was woken up and I thought it was a reminder of taking my medication, and then I learnt that it was not about medication, it was about the Prize.
AS: It’s a nice surprise.
BH: It was a very nice surprise, yes.
AS: Oliver Hart said that he phoned you early.
BH: Yes, Oliver Hart, I’m so glad that I won it with him. He’s my closest friend here, and you know we have worked together and talked together over the years, and he has been a great inspiration for my research.
AS: One thing I read was that you are a proponent of using the blackboard, the chalkboard, when teaching. You never use slides. That seems quite surprising these days.
BH: I use slides when I give seminars, but I would say that I like to look at people that teach from the blackboard and I teach myself from the blackboard.
AS: I suppose it aids thinking.
BH: Well it’s much easier for the people to think, and it gives you the freedom to go wherever the lecture goes. I’m not a person who plans exactly what I’m going to say. It depends on what questions people ask and what they want to talk about. My lectures are never the same even though the title may be the same.
AS: Could you extend that process to talking about your own research, that you just see which avenues you follow next, you allow yourself freedom?
BH: Well I think you have to have a goal, but yes research that takes its own path, an unexpected path, that’s a very essential part of doing research. So research that exactly goes where you expected it to go is uninteresting on the whole. You need to start travelling somewhere, you know you have to decide you want to get to Stockholm, but if on the way, you know, you see Paris you may want to stop there, to give you a sort of metaphorical answer. Research is a trip, and you have to be attentive to all the things you see and be able also to move away from the planned path.
AS: The Prize will of course focus the world’s attention on contract theory, and I imagine it is increasingly important given the growing public debate about incentives, and corporate governance, and public versus private provision of services etc.
BH: Yes. But I want to emphasise that it’s not just about money. People have a very narrow view of incentives, but one can say that almost everything in economics is about incentives, but if you look at incentive theory what has happened is that instead of just focussing on some ways to pay people so that they do certain things, it’s very much about structuring their jobs or structuring the organisation in a way that motivates. So the issue of motivation is hugely broader than just asking you know how should people get the CEO to behave in a particular way, and financial monetary incentives are in some sense too effective often. They are very powerful in sending signals as well as, of course, rewarding finically. And so one has to be very careful in their use.
AS: That’s very interesting. So one must think more broadly.
BH: Yes. So not paying people is also an incentive, if one wants to put it that way. Sometimes no financial incentive is the best incentive.
AS: Now you’re in for a day, I suppose, of constant interviews and conversations. How does that strike you?
BH: Well, it’s another twist. You know I take it where it goes. I follow where it goes. I have no idea what’s ahead.
AS: Well I wish you every success and joy in your journey into the unknown today.
BH: Thank you very much.
AS: We very much look forward to welcoming you to Stockholm in December.
BH: Yes, I am fully intending to come. Thanks so much.
AS: Thank you.
BH: Bye bye.
*Additional report by AFP