Pay without Performance.

AuthorO'Byrne, Stephen F.
PositionBook - Book Review

Pay without Performance

By Lucian Bebchuk and Jesse Fried

Published by Harvard University Press, Cambridge, Mass., 278 pages, $24.95

PAY WITHOUT PERFORMANCE, subtitled The Unfulfilled Promise of Executive Compensation, is a fascinating and complex book. It draws on a wide range of research and makes a compelling brief that pay is unrelated to performance, corporate directors have strong incentives to favor management at the expense of shareholders, and significant corporate governance reforms are needed to make directors pursue shareholder interests when they conflict with management interests.

Lucian Bebchuk and Jesse Fried, law professors at Harvard and the University of California, Berkeley, respectively, argue that strong social and economic pressures discourage directors from aggressive pay bargaining with the CEO. Directors will be deferential to a CEO who invited them to join the board. Directors will also be deferential to the CEO because they have little hope of re-election if they raise the CEO's ire by insisting on pay that reflects poor performance. The authors cite academic studies showing that CEO compensation is higher when the outside directors are appointed by the CEO, the compensation committee chair is named after the CEO takes office, and the compensation committee members are highly paid in their primary employment.

Bebchuk and Fried argue that director independence, even with the new stock exchange rules, and public pressure are not sufficient to improve executive compensation. Directors who are completely independent of the CEO will not necessarily pursue the shareholders' interest; they are just as likely to pursue their own agenda by, for example, promoting pet projects, raising director pay, or hiring or promoting favored executives.

The authors offer several proposals to improve pay for performance and corporate governance. They recommend giving shareholders a much stronger role in director elections. Shareholder groups that have owned 5 percent of the company for at least a year should be able to nominate a full slate of directors (staggered boards would be eliminated) and have their costs paid by the company if they gain substantial support. As an alternative, albeit a less desirable one, they propose limiting director discretion by requiring shareholder approval for "bad pay," e.g., options that are not indexed to eliminate market or industry price changes or do not require a substantial holding period after...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT