Pay Without Performance: Overview of the Issues
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Jesse M. Fried
Harvard Law School; European Corporate Governance Institute (ECGI)
Journal of Corporation Law, Vol. 30, No. 4, pp. 647-673, 2005
Journal of Applied Corporate Finance, Vol. 17, No. 4, pp. 8-22, 2005
Academy of Management Perspectives, pp. 5-24, February 2006
Harvard Law and Economics Discussion Paper No. 528
In a recent book, Pay without Performance: The Unfulfilled Promise of executive Compensation, we critique existing executive pay arrangements and the corporate governance processes producing them, and put forward proposals for improving both executive pay and corporate governance. This paper provides an overview of the main elements of our critique and proposals. We show that, under current legal arrangements, boards cannot be expected to contract at arm's length with the executives whose pay they set. We discuss how managers' influence can explain many features of the executive compensation landscape, including ones that researchers subscribing to the arm's length contracting view have long viewed as puzzling. We also explain how managerial influence can lead to inefficient arrangements that generate weak or even perverse incentives, as well as to arrangements that make the amount and performance-insensitivity of pay less transparent. Finally, we outline our proposals for improving the transparency of executive pay, the connection between pay and performance, and the accountability of corporate boards.
Number of Pages in PDF File: 16
Keywords: Keywords: Corporate governance, managers, shareholders, boards, directors, executive compensation, stock options, principal-agent problem, agency costs, rent extraction, disclosure, stealth compensation, compensation consultants, camouflage.
JEL Classification: D23, G32, G34, G38, J33, J44, K22, M14
Date posted: July 19, 2005 ; Last revised: April 28, 2009
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