Executive Compensation in Contemporary Corporate Governance: Why Pay for Performance is a Flawed Methodology

Abstract

In late 2004, law professors Lucian Bebchuk and Jesse Fried released a controversial new work, Pay without Performance: The Unfulfilled Promise of Executive Compensation. In Pay without Performance, Bebchuk and Fried highlight that in recent times there has been a decoupling of pay and performance in the United States, and articulate a "managerial power" thesis to explain this trend.

In this article, the author outlines the case for why pay for performance is not an "unfulfilled" promise, but rather is no promise at all. The author argues that agency theory, and pay for performance which is based upon agency theory, derives from a narrow, and ultimately false understanding of human motivation and behaviour. Drawing on an extensive range of literature in psychology, management and workplace relations, behavioural law and economics, sociology, philosophy and law, the author explains why the view of agency theorists regarding the importance of remuneration is misguided.

Keywords: executive compensation, corporate governance, corporate finance, norms, behavioral law and economics