
The man who designed your bonus just won the Nobel Prize in Economics - shawnee_
http://www.afr.com/opinion/columnists/the-man-who-designed-your-bonus-just-won-the-nobel-prize-in-economics-20161010-grzaca
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shawnee_
Interesting write-up of the prize-winning research into contract theory and
"optimal" incentives.

 _In his first major contribution, Holmström showed what set of performance
measures should be part of the contract. His so-called "informativeness
principle" basically says that any performance measure which provides
additional information about the actions the agent took should be part of the
contract.

A striking implication of this is the managers should not be rewarded for
luck. An oil company CEO who cannot control the oil price should not get a
windfall gain (or loss) from movements in the oil price. The optimal contract
should filter that out. To use a topical example, bank CEOs should not benefit
from a general rise in the banking sector (say because of interest rates) –
their stock options should be indexed to the stock prices of their
competitors._

Also: [https://www.nobelprize.org/nobel_prizes/economic-
sciences/la...](https://www.nobelprize.org/nobel_prizes/economic-
sciences/laureates/2016/advanced-economicsciences2016.pdf)

