The company is under-performing, its share price is trailing, and the CEO gets...a multi-million-dollar raise. This story is familiar, for good reason: as this book clearly demonstrates, structural flaws in corporate governance have produced widespread distortions in executive pay. Pay without Performance presents a disconcerting portrait of managers' influence over their own pay--and of a governance system that must fundamentally change if firms are to be managed in the interest of shareholders.
Lucian Bebchuk and Jesse Fried demonstrate that corporate boards have persistently failed to negotiate at arm's length with the executives they are meant to oversee. They give a richly detailed account of how pay practices--from option plans to retirement benefits--have decoupled compensation from performance and have camouflaged both the amount and performance-insensitivity of pay. Executives' unwonted influence over their compensation has hurt shareholders by increasing pay levels and, even more importantly, by leading to practices that dilute and distort managers' incentives.
This book identifies basic problems with our current reliance on boards as guardians of shareholder interests. And the solution, the authors argue, is not merely to make these boards more independent of executives as recent reforms attempt to do. Rather, boards should also be made more dependent on shareholders by eliminating the arrangements that entrench directors and insulate them from their shareholders. A powerful critique of executive compensation and corporate governance, Pay without Performance points the way to restoring corporate integrity and improving corporate performance.
Industry Reviews
Ever wonder if corporate executives are paid too much? Look at it this way: from 1993 to 2002, the aggregate compensation of the top five executives in all public companies amounted to an astonishing $250 billion, equivalent to 7.5% of all corporate earnings. Defenders of the status quo say that such bloated pay provides managers particularly CEOs with incentives crucial to high performance. Those defenders have not yet read Lucian Bebchuk and Jesse Fried's Pay Without Performance. The authors marshal a formidable arsenal of facts to pick apart the incentives argument, exposing myriad ways in which CEOs have decoupled pay from performance and hidden that fact from investors with the aid of supine corporate directors. The lucidly argued treatise frames the issue not in ethical terms but as a problem of efficiency. As for solutions, Bebchuk and Fried maintain that board directors should be not only more independent of the executives they supervise but also much more dependent on stockholders. If shareholders had the power to alter the composition of the corporate board, the authors argue, directors would be more likely to keep investors' interests top of mind when setting CEO salaries and perks. -- Unmesh Kher Time Magazine 20041128 In times both bullish and bearish, there is periodic outrage over huge compensation packages for executives at publicly traded companies. The recent wave of corporate scandals only inflamed concerns that companies' boards of directors, too cozy with CEO's, were betraying their duty to shareholders. Reacting, defenders of corporate America have often offered 'rotten apple' theories and other explanations that deny any systemic problem. Inadequate, say Lucian Bebchuk, a professor of law, economics, and finance at Harvard University, and Jesse Fried, a professor of law at the University of California at Berkeley. In Pay Without Performance, the scholars uncover what they say are widespread, persistent, and indeed systemic flaws in compensation arrangements. -- Nina C. Ayoub Chronicle of Higher Education 20041203 Lucian Bebchuk and Jesse Fried offer a devastating critique of the way public companies pay their top executives. Relying on data rather than rhetoric, Fried and Bebchuk describe a diseased system in which executives wield enormous influence over their pay, board members have little incentive to slow the gravy train, and everyone involved goes to great lengths to hide the numbers from shareholders...Those looking for a substantive deconstruction of the system--and a few ideas to fix it--could hardly do better. -- Ben White Washington Post 20041205 In Pay Without Performance, Lucian Bebchuk of Harvard and Jesse Fried of Berkeley set out to identify the failure of corporate governance that allows chief executives' compensation to carry on rising with little relation to performance. They point the finger firmly at board directors. The Economist 20041218 For anyone looking for a guide to the debate over American top pay, this book will be indispensable. It is clear, well-argued, fully researched and deeply felt. -- Michael Skapinker Financial Times 20050207 Pay Without Performance is a significant book. It is a well-researched, careful study of a problem that has attracted considerable attention since the 1980s. The authors write well and manage at once to make the book readable and to satisfy the scholar's need to see evidence and documentation... Pay Without Performance is an important contribution to the continuing discussion about corporate governance. It will repay a careful reading, and it is likely to achieve the influence it deserves to have. -- Robert G. Kennedy Ethics and Economics This book has important messages about where [the balance between managers, directors, and shareholders] should lie, not just with regard to executive compensation but to governance in general. -- Peter Montagnon Management Today 20050201 If one has time to read only a single book about corporate governance in US publicly traded companies, this is the book to read. -- James A. Fanto International Company and Commercial Law Review [This book] does add to the discourse about executive compensation and corporate governance by offering an alternative view of the factors underlying executive compensation. -- Joseph Gerakos Journal of Pension Economics and Finance I rate this as an important book that should help to get the academic profession thinking in a new direction. The supporters of the conventional model of compensation clearly have a case to answer, and this book makes it plain what the challenges to developing a better understanding of executive compensation are. Thus, it will surely generate a productive debate...The book should also be seen as a welcome contribution to the corporate-governance debate in Europe, as it provides a sobering perspective on what many regard as a role model. Everybody who wants to participate in the debate on executive compensation should read this book. -- Ernst Maug Journal of Institutional and Theoretical Economics 20060101
