Ronald Coase, who won the Nobel Prize in 1991, remarked that one of the advantages of the award is that it can draw attention to neglected areas of economies. I hope that this will occur with the award of the 2014 Nobel Prize for Economics to Jean Tirole. For several years I have been commenting on the damage being done to the UK and US economies by the way corporate behaviour has altered in response to the change in management remuneration. Happily from my viewpoint, this is also a concern of Mr Tirole’s, who is the co-author with Roland Bénabou of a paper, shortly to be published in the Journal of Political Economy, called “Bonus Culture: Competitive Pay, Screening, and Multitasking”. I hope that the publicity that usually surrounds the work of Nobel laureates will at last lead to wide discussion of the damage done by current management remuneration systems. I fear that my own efforts to generate interest in this problem have not so far proved very effective.
The Bénabou/Tirole paper comments that in recent years we have seen a literal explosion of remuneration, both in levels and in differentials, and it is claimed that these stratospheric pay packets are needed in order to retain talented people and give them incentives to perform. The authors note that, paradoxically, this trend has been accompanied by mounting revelations of poor actual performance, severe moral hazard and even outright fraud and that the change in behaviour has also had a negative impact on the rest of society. They explain how competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management and co-operation. The result is a bonus culture that takes over the workplace, distorting decisions and causing significant efficiency losses, particularly in the long run. Read more