Pay Without Performance: Overview of the Issues

16 Pages Posted: 19 Jul 2005 Last revised: 28 Apr 2009

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)


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.

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

Suggested Citation

Bebchuk, Lucian A. and Fried, Jesse M., Pay Without Performance: Overview of the Issues. 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. 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
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Jesse M. Fried

Harvard Law School ( email )

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


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels

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