Pay Without Performance: The Unfulfilled Promise of Executive Compensation

Harvard University Press, 2004

18 Pages Posted: 30 Apr 2004 Last revised: 18 Jul 2019

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER)

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)


This book provides a detailed account of how structural flaws in corporate governance have enabled managers to influence their own pay and produced widespread distortions in pay arrangements. The book also examines how these flaws and distortions can best be addressed.

Part I of the book (titled The Official View and its Limits) critically examines the arm's length contracting view, which underlies much of the academic research on executive compensation as well as the law's approach to it. We show that boards have not been operating at arm's length from the executives whose pay they set. While recent reforms can improve matters, they cannot be expected to eliminate significant deviations from arm's length contracting. We also show that the constraints imposed by market forces and shareholders' power to intervene are not tight enough to prevent such deviations.

Part II of the book (titled Power and Pay) shows how an understanding of the role of managerial power can help explain executive compensation practices. We provide a framework for assessing whether pay arrangements are a product of managerial influence. We discuss managers' interest in camouflaging the amount and the performance-insensitivity of their pay. Applying our framework, we discuss how managerial influence can help explain, among other things, the evidence on the relationship between managerial pay and managerial power; the use of retirement benefits and other compensation arrangements to provide stealth compensation; and the ability of departing managers to obtain more than their contractual entitlement.

Part III of the book (titled Decoupling Pay from Performance) examines how managerial influence has operated to reduce the performance-sensitivity of executive pay. Among other things, we examine the structure of non-equity compensation, the design of conventional option plans, the use of restricted stock grants, and managers' freedom to unload options and shares.

Part IV of the book (titled Going Forward) discusses how executive compensation - and corporate governance more generally - can be improved. We examine the extent to which pay arrangements can be improved by adopting board process rules, imposing shareholder approval requirements, and making pay more transparent. We conclude that problems with compensation arrangements cannot be fully addressed without ensuring that directors focus on shareholder interests and operate at arm's length from the executives whose compensation they set. To achieve this result, we argue, it is not sufficient to make directors independent of executives as recent reforms has sought to do; it is also necessary to make directors dependent on shareholders by changing the legal arrangements that insulate boards from shareholders.

The preface and introduction are available for download at the bottom of this page. Also available for download from SSRN are:

(1) A paper providing a summary and overview of the book:

Lucian Bebchuk and Jesse Fried, "Pay Without Performance: Overview of the Issues," Journal of Corporation Law, Vol. 30, pp.647-573, 2005,; and

(2) Three papers on which the book partly draws:

(a) Lucian Bebchuk and Jesse Fried, "Stealth Compensation Via Retirement Benefits," Berkeley Business Law Journal, Vol. 1, pp. 291-326, 2004,;

(b) Lucian Bebchuk and Jesse Fried, "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, Vol. 17, pp. 71-92, 2003,; and

(c) Lucian Bebchuk, Jesse Fried, and David Walker, "Managerial Power and Rent Extraction in the Design of Executive Compensation," University of Chicago Law Review, Vol. 69, pp. 751-846, 2002,

Keywords: Corporate governance, managers, executives, shareholders, boards, directors, executive compensation, principal-agent problem, pay for performance, agency costs, stock options, rents, camouflage

JEL Classification: D23, G32, G34, G38, J33, J44, K22, M14, M41

Suggested Citation

Bebchuk, Lucian A. and Fried, Jesse M., Pay Without Performance: The Unfulfilled Promise of Executive Compensation. Harvard University Press, 2004. Available at SSRN:

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)


National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jesse M. Fried

Harvard Law School ( email )

1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)


European Corporate Governance Institute (ECGI) ( email )

B-1050 Brussels

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