Optimal Executive Compensation vs. Managerial Power: A Review of Lucian Bebchuk and Jesse Fried's Pay Without Performance: The Unfulfilled Promise of Executive Compensation

18 Pages Posted: 24 Oct 2006

See all articles by Michael S. Weisbach

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: November 14, 2006

Abstract

This essay reviews Bebchuk and Fried's Pay without Performance: The Unfulfilled Promise of Executive Compensation. Bebchuk and Fried criticize the standard view of executive compensation, in which executives negotiate contracts with shareholders that provide incentives that motivate them to maximize the shareholders' welfare. In contrast, Bebchuk and Fried argue that executive compensation is more consistent with executives who control their own boards, and who maximize their own compensation subject to an outrage constraint. They provide a host of evidence consistent with this alternative viewpoint. The book can be evaluated from both a positive and a normative perspective. From a positive perspective, much of the evidence they present, especially about the camouflage and risk-taking aspects of executive compensation systems, is fairly persuasive. However, from a normative perspective, the book conveys the idea that policy changes can dramatically improve executive compensation systems and consequently overall corporate performance. It is unclear to me how effective in practice are potential reforms designed to achieve such changes likely to be.

Keywords: executive compensation, managerial power, arms-length contracting

JEL Classification: G34, J33, J40, K22

Suggested Citation

Weisbach, Michael S., Optimal Executive Compensation vs. Managerial Power: A Review of Lucian Bebchuk and Jesse Fried's Pay Without Performance: The Unfulfilled Promise of Executive Compensation (November 14, 2006). Available at SSRN: https://ssrn.com/abstract=939785 or http://dx.doi.org/10.2139/ssrn.939785

Michael S. Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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