Pay without Performance: Overview of the issues

In a recent book, Pay without Performance: The Unfulfilled Promise of Executive Compensation, Bebchuk and Fried critique existing executive pay arrangements and the corporate governance processes that produce them. They also put forward proposals for improving both executive pay and corporate governance. This paper provides an overview of the main elements of their critique and proposals. The authors show that, under current legal arrangements, boards cannot be expected to contract at arm's length with the executives whose pay they set. They 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 considered as puzzling. The authors 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, they outline proposals for improving the transparency of executive pay, the connection between pay and performance, and the accountability of corporate boards.