Pay without Performance: The Unfulfilled Promise of Executive Compensation

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By Lucian Bebchuk and Jesse Fried
Harvard University Press, 2004
294 pages, $24.95

Pay without Performance is a dense but highly readable guide to the morass that is executive compensation in the United States, together with suggestions on how corporate America can extricate itself from the swamp.

Lucian Bebchuk is professor of law, economics, and finance and is director of the program on corporate governance at Harvard Law School; Jesse Fried is professor of law at the University of California at Berkeley. They begin by outlining the conventional method of setting executive compensation — boards of directors bargain with executives at arm’s length — and the prevailing view that market forces (the value of executives in an era of low supply and high demand) determine the levels of compensation reached. They contrast this view with their own contention: that executives, particularly CEOs, tend to use their managerial power to extract excessive compensation from corporations. In 16 chapters, Professors Bebchuk and Fried meticulously strip away the camouflage and deception that conceal the myriad ways in which executives are paid.

Although one might dispute some individual issues in the authors’ argument, the overall picture is devastating. “Market-based compensation” seems to be merely a convenient fiction that CEOs and boards of directors use to justify the status quo.

On compensation, Pay without Performance recommends changes to reduce windfalls in equity-based pay plans: filtering out industrywide and marketwide gains; improving the links between bonus plans and performance; avoiding “soft landings” in the event of failure; and quantifying and making transparent the magnitude of pay that is unrelated to performance. Shareholders, they argue, should have a much more direct say in compensation matters. Further, the corrupting influence of the “free money” that is share options should be eliminated through a requirement to expense such options. On corporate governance, the authors believe much can be done to revitalize corporate elections, making the selection and appointment of directors more dependent on shareholders. The vigorous objections of corporate interest groups to even the mild reforms currently being proposed by the Securities and Exchange Commission suggest that the road ahead will be difficult. Professors Bebchuk and Fried have written a book that provides a compelling case for making the journey.

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