The 2016 Nobel Prize In Economics has been awarded to Bengt Holmström of the Massachusetts Institute of Technology (MIT) and Oliver Hart of Harvard University for their work in Workforce Analytics, suggesting that the practice is finally gaining the recognition it deserves.
Holmström and Hart were awarded the prize for their contributions to contract theory, which the jury noted was ’a comprehensive framework for analyzing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatization of public-sector activities.’
Contract theory is the study of formal and informal agreements and how they motivate people with conflicting interests to take mutually beneficial actions. According to a statement by the Royal Swedish Academy of Science, ‘One of the theory’s goals is to explain why contracts have various forms and designs. Another goal is to help us work out how to draw up better contracts, thereby shaping better institutions in society… Hart's and Holmström's research sheds light on how contracts help us deal with conflicting interests.’
Holmstrom, in particular, has focused on how contract theory could be applied in the workplace, with his research into the area dating back to the 1970s. He demonstrated how a principal, such as a company’s shareholders, should design an optimal contract for an agent, such as the CEO. He developed his ‘informativeness principle’, which argued that contracts should link the agent’s pay to information relevant to his or her performance, carefully weighing risks against incentives. Such research has assumed an even greater significance in recent as a result of the public outcry around the eye-watering bonuses paid to bankers at failed banks and energy chiefs at failing energy companies. According to Holmström, the best contracts encourage executives to innovate without being reckless - a lesson that if it had been taken on board during the banking crisis could have helped prevent the catastrophe that occurred. His research led him to recommend a package weighted towards bonuses for a younger executive with ambitions to be promoted, but for CEOs nearing retirement, it could simply encourage them to take risks that someone else will have to clear up if they don’t come off.
According to a report by Deloitte consulting, ‘HR Technology Disruptions for 2017: Nine Trends Reinventing the HR Software Market,’ human resources analytics is increasingly being used to help companies predict fraud and detect compliance violations, identify top employees at risk of quitting, and find the drivers of unplanned absences among staff. Which is supported with real-world experiences that we have found, with calls for both HR content and comment increasing significantly over the past 12 months.
However, according to Thomsons Online Benefits' Global Employee Benefits Watch 16/17, while employers using data analytics have 14% higher employee engagement scores than those who do not (73% compared to 59%), 46% of HR and reward professionals who responded to their survey said they don’t yet use analytics at all. These numbers indicate that although there is already some success in the adoption of HR analytics, but that there is also room for considerable expansion. This may be due to HR leaders not yet trusting HR data, pushback from employees who may see it as intrusive or even just a lack of funding from financial leaders for these projects.
That the work being done by Holmström and Hart has been recognized with the biggest prize in economics shows how important it is. Hopefully, this attitude will filter down to decision makers, who can ramp up investment in the technologies and training that HR departments need to really utilize the data they collect to its full potential.