Pay Without Performance and the Managerial Power Hypothesis: A Comment

14 Pages Posted: 1 May 2006

See all articles by Bengt R. Holmström

Bengt R. Holmström

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)


Executive compensation and corporate governance problems need to be seen in a larger historical context than is commonly done. The proximate causes of corporate scandals and executive pay problems have been identified, but the real drivers have not. A need for corporate restructuring, which emerged already in the 1970s, led to the remarkable rise in shareholder influence and the relentless pursuit for shareholder value. It placed exceptional demands on boards and led to extreme pay schemes that appear to have served the restructuring purposes well, but had unintended and unfortunate side-effects. In contemplating pay and governance reforms, it is essential to keep in mind the longer chain of events to avoid naive corrective measures that do not take into account the information and incentive constraints under which the various constituents and bodies in the larger governance system, especially the boards and shareholders, operate. Some of the recent advice on executive compensation seems very misguided in a longer historical perspective as is the push for extensive shareholder intervention rights.

Keywords: Executive Compensation, Corporate Governance, Corporate Restructuring

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

Suggested Citation

Holmström, Bengt R., Pay Without Performance and the Managerial Power Hypothesis: A Comment. Available at SSRN: or

Bengt R. Holmström (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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