Pay without Performance: The Unfulfilled Promise of Executive Compensation / Edition 1

by Lucian Bebchuk, Jesse Fried

Overview

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.

Product Details

ISBN-13:	9780674022287
Publisher:	Harvard University Press
Publication date:	09/30/2006
Edition description:	New Edition
Pages:	304
Sales rank:	939,490
Product dimensions:	6.12(w) x 9.25(h) x 0.76(d)

About the Author

Lucian Bebchuk is Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School.

Jesse Fried is Professor of Law and Co-Director of the Berkeley Center for Law, Business, and the Economy at the University of California, Berkeley.

Table of Contents

Preface

Introduction

PART I. THE OFFICIAL VIEW AND ITS SHORTCOMINGS

1. The Official Story

2. Have Boards Been Bargaining at Arm's Length?

3. Shareholders' Limited Power to Intervene

4. The Limits of Market Forces

PART II. POWER AND PAY

5. The Managerial Power Perspective

6. The Relationship between Power and Pay

7. Managerial Influence on the Way Out

8. Retirement Benefits

9. Executive Loans

PART III. DECOUPLING PAY FROM PERFORMANCE

10. Non-Equity-Based Compensation

11. Windfalls in Conventional Options

12. Excuses for Conventional Options

13. More on Windfalls in Equity-Based Compensation

14. Freedom to Unwind Equity Incentives

PART IV. GOING FORWARD

15. Improving Executive Compensation

16. Improving Corporate Governance

Notes

References

Index

What People are Saying About This

Lucian Bebchuk and Jesse Fried have brought to light one of the most important issues facing our society today. I agree enthusiastically and almost completely with their analysis of the problem.

Arthur Levitt

Lucian Bebchuk and Jesse Fried have brought to light one of the most important issues facing our society today. I agree enthusiastically and almost completely with their analysis of the problem.
— Arthur Levitt, Jr., former SEC Chairman

Graef Crystal

Bebchuk and Fried have written a superb book. It will benefit academics and non-academics alike, and shed much light on the great executive pay debate.
— Graef Crystal, author of In Search of Excess

John C. Bogle

Like Thomas Paine's Common Sense in an earlier era, Pay Without Performance is a terse manifesto for our age of manager's capitalism--a crystal clear and dispassionate, but ultimately devastating, analysis of how our deeply flawed system of corporate governance has led to grossly excessive executive compensation. This is a book that must be read, not only by any citizen who cares about sound corporate governance, but by any citizen who cares about our society--the best book that I've ever read on the subject.
— John C. Bogle, Founder, The Vanguard Group

John Coffee

Bebchuk and Fried, careful scholars of the first rank, develop a compelling critique of the market for managerial services. Pay is decoupled from performance. Executive compensation is neither fair nor efficient, operating as much on stealth as on open negotiation. Their evidence, their conclusions, and their recommendations cannot be ignored: they should be studied by boards, courts, the SEC-and anyone who wants contemporary corporate governance to work.
— John Coffee, Jr., Columbia Law School

Joseph Stiglitz

Bebchuk and Fried present a powerful challenge to financial economists' view that compensation arrangements are designed by boards seeking to increase shareholder value. They offer a compelling account of how managers' influence has distorted executive pay. By showing how boards have failed to guard shareholder interests, Bebchuk and Fried raise fundamental questions concerning our corporate governance system and lay the ground for their proposed reforms. Their work will shape debates on executive compensation and corporate governance for years to come.
— Joseph Stiglitz, Nobel Laureate in Economics, and author of The Roaring Nineties

Ira Kay

A profound and insightful analysis of the crisis in executive compensation.
— Ira Kay, WatsonWyatt

Oliver Hart

Bebchuk and Fried argue persuasively that executives of large companies have immense power, and that they use this power to pay themselves large amounts that are insufficiently related to performance. Nobody who reads this book will feel quite the same about Corporate America again.
— Oliver Hart, Harvard University, and author of Firms, Contracts, and Financial Structure

John Kenneth Galbraith

The most important change in corporate structure in the United States has been the shift of authority from stockholders and their directors to management. The dominance of management is fact, but the fiction of investor control persists. From management authority comes control of management compensation. That this should be generous, even lavish, and with no necessary relation to performance, is the reality of modern economic life. This literate and learned book is for all who wish to learn the facts and consequences.

Editorial Reviews

Bebchuk and Fried, careful scholars of the first rank, develop a compelling critique of the market for managerial services. Pay is decoupled from performance. Executive compensation is neither fair nor efficient, operating as much on stealth as on open negotiation. Their evidence, their conclusions, and their recommendations cannot be ignored: they should be studied by boards, courts, the SEC-and anyone who wants contemporary corporate governance to work.

John Coffee

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.

Financial Times - Michael Skapinker

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.

Management Today - Peter Montagnon

Lucian Bebchuk and Jesse Fried have brought to light one of the most important issues facing our society today. I agree enthusiastically and almost completely with their analysis of the problem.

Arthur Levitt

Bebchuk and Fried present a powerful challenge to financial economists' view that compensation arrangements are designed by boards seeking to increase shareholder value. They offer a compelling account of how managers' influence has distorted executive pay. By showing how boards have failed to guard shareholder interests, Bebchuk and Fried raise fundamental questions concerning our corporate governance system and lay the ground for their proposed reforms. Their work will shape debates on executive compensation and corporate governance for years to come.

Joseph Stiglitz

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.

Chronicle of Higher Education - Nina C. Ayoub

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

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

[This book] does add to the discourse about executive compensation and corporate governance by offering an alternative view of the factors underlying executive compensation.

Journal of Pension Economics and Finance - Joseph Gerakos

Bebchuk and Fried have written a superb book. It will benefit academics and non-academics alike, and shed much light on the great executive pay debate.

Graef Crystal

Bebchuk and Fried argue persuasively that executives of large companies have immense power, and that they use this power to pay themselves large amounts that are insufficiently related to performance. Nobody who reads this book will feel quite the same about Corporate America again.

Oliver Hart

Like Thomas Paine's Common Sense in an earlier era, Pay Without Performance is a terse manifesto for our age of manager's capitalism—a crystal clear and dispassionate, but ultimately devastating, analysis of how our deeply flawed system of corporate governance has led to grossly excessive executive compensation. This is a book that must be read, not only by any citizen who cares about sound corporate governance, but by any citizen who cares about our society—the best book that I've ever read on the subject.

John C. Bogle

The most important change in corporate structure in the United States has been the shift of authority from stockholders and their directors to management. The dominance of management is fact, but the fiction of investor control persists. From management authority comes control of management compensation. That this should be generous, even lavish, and with no necessary relation to performance, is the reality of modern economic life. This literate and learned book is for all who wish to learn the facts and consequences.

John Kenneth Galbraith

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.

Time Magazine - Unmesh Kher

A profound and insightful analysis of the crisis in executive compensation.

Ira Kay

If one has time to read only a single book about corporate governance in US publicly traded companies, this is the book to read.

International Company and Commercial Law Review - James A. Fanto

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.

Journal of Institutional and Theoretical Economics - Ernst Maug

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.

Ethics and Economics - Robert G. Kennedy

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

[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

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 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

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

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

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

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

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