528. Lucian A. Bebchuk & Jesse M. Fried, Pay Without Perfomance: Overview of the Issues, 10/2005; subsequently published in Journal of Corporation Law, Vol. 30, No. 14, Summer 2005, 647-674; and in Journal of Applied Corporate Finance, Vol. 17, No. 4, 2005, 8-23.
Abstract: 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.