Product Description

The company is under-performing, its share price is trailing, and the CEO gets...a multi-million-dollar raise. This story is familiar, for good reason: as this book clearly demonstrates, structural flaws in corporate governance have produced widespread distortions in executive pay. Pay without Performance presents a disconcerting portrait of managers' influence over their own pay--and of a governance system that must fundamentally change if firms are to be managed in the interest of shareholders.

Lucian Bebchuk and Jesse Fried demonstrate that corporate boards have persistently failed to negotiate at arm's length with the executives they are meant to oversee. They give a richly detailed account of how pay practices--from option plans to retirement benefits--have decoupled compensation from performance and have camouflaged both the amount and performance-insensitivity of pay. Executives' unwonted influence over their compensation has hurt shareholders by increasing pay levels and, even more importantly, by leading to practices that dilute and distort managers' incentives.

This book identifies basic problems with our current reliance on boards as guardians of shareholder interests. And the solution, the authors argue, is not merely to make these boards more independent of executives as recent reforms attempt to do. Rather, boards should also be made more dependent on shareholders by eliminating the arrangements that entrench directors and insulate them from their shareholders. A powerful critique of executive compensation and corporate governance, Pay without Performance points the way to restoring corporate integrity and improving corporate performance.

Product Details

• Amazon Sales Rank: #85852 in Books
• Published on: 2006-09-30
• Original language: English
• Number of items: 1
• Binding: Paperback
• 304 pages

Joseph Stiglitz, Nobel Laureate in Economics, and author of The Roaring Nineties
[This] work will shape debates on executive compensation and corporate governance for years to come.

Review
Bebchuk and Fried present a powerful challenge to financial economists' view that compensation arrangements are designed by boards seeking to increase shareholder value. They offer a compelling account of how managers' influence has distorted executive pay. By showing how boards have failed to guard shareholder interests, Bebchuk and Fried raise fundamental questions concerning our corporate governance system and lay the ground for their proposed reforms. Their work will shape debates on executive compensation and corporate governance for years to come.
--Joseph Stiglitz, Nobel Laureate in Economics, and author of The Roaring Nineties (20041203)

Like Thomas Paine's Common Sense in an earlier era, Pay Without Performance is a terse manifesto for our age of manager's capitalism--a crystal clear and dispassionate, but ultimately devastating, analysis of how our deeply flawed system of corporate governance has led to grossly excessive executive compensation. This is a book that must be read, not only by any citizen who cares about sound corporate governance, but by any citizen who cares about our society--the best book that I've ever read on the subject.
--John C. Bogle, Founder, The Vanguard Group (20041205)

Bebchuk and Fried, careful scholars of the first rank, develop a compelling critique of the market for managerial services. Pay is decoupled from performance. Executive compensation is neither fair nor efficient, operating as much on stealth as on open negotiation. Their evidence, their conclusions, and their recommendations cannot be ignored: they should be studied by boards, courts, the SEC-and anyone who wants contemporary corporate governance to work.
--John Coffee, Jr., Columbia Law School (20041218)

The most important change in corporate structure in the United States has been the shift of authority from stockholders and their directors to management. The dominance of management is fact, but the fiction of investor control persists. From management authority comes control of management compensation. That this should be generous, even lavish, and with no necessary relation to performance, is the reality of modern economic life. This literate and learned book is for all who wish to learn the facts and consequences.
--John Kenneth Galbraith (20050207)

Bebchuk and Fried argue persuasively that executives of large companies have immense power, and that they use this power to pay themselves large amounts that are insufficiently related to performance. Nobody who reads this book will feel quite the same about Corporate America again.
--Oliver Hart, Harvard University, and author of Firms, Contracts, and Financial Structure (20050201)

Bebchuk and Fried have written a superb book. It will benefit academics and non-academics alike, and shed much light on the great executive pay debate.
--Graef Crystal, author of In Search of Excess (20060101)

A profound and insightful analysis of the crisis in executive compensation.
--Ira Kay, WatsonWyatt

Lucian Bebchuk and Jesse Fried have brought to light one of the most important issues facing our society today. I agree enthusiastically and almost completely with their analysis of the problem.
--Arthur Levitt, Jr., former SEC Chairman

Ever wonder if corporate executives are paid too much? Look at it this way: from 1993 to 2002, the aggregate compensation of the top five executives in all public companies amounted to an astonishing $250 billion, equivalent to 7.5% of all corporate earnings. Defenders of the status quo say that such bloated pay provides managers particularly CEOs with incentives crucial to high performance. Those defenders have not yet read Lucian Bebchuk and Jesse Fried's Pay Without Performance. The authors marshal a formidable arsenal of facts to pick apart the incentives argument, exposing myriad ways in which CEOs have decoupled pay from performance and hidden that fact from investors with the aid of supine corporate directors. The lucidly argued treatise frames the issue not in ethical terms but as a problem of efficiency. As for solutions, Bebchuk and Fried maintain that board directors should be not only more independent of the executives they supervise but also much more dependent on stockholders. If shareholders had the power to alter the composition of the corporate board, the authors argue, directors would be more likely to keep investors' interests top of mind when setting CEO salaries and perks.
--Unmesh Kher (Time Magazine )

In times both bullish and bearish, there is periodic outrage over huge compensation packages for executives at publicly traded companies. The recent wave of corporate scandals only inflamed concerns that companies' boards of directors, too cozy with CEO's, were betraying their duty to shareholders. Reacting, defenders of corporate America have often offered 'rotten apple' theories and other explanations that deny any systemic problem. Inadequate, say Lucian Bebchuk, a professor of law, economics, and finance at Harvard University, and Jesse Fried, a professor of law at the University of California at Berkeley. In Pay Without Performance, the scholars uncover what they say are widespread, persistent, and indeed systemic flaws in compensation arrangements.
--Nina C. Ayoub (Chronicle of Higher Education )

Lucian Bebchuk and Jesse Fried offer a devastating critique of the way public companies pay their top executives. Relying on data rather than rhetoric, Fried and Bebchuk describe a diseased system in which executives wield enormous influence over their pay, board members have little incentive to slow the gravy train, and everyone involved goes to great lengths to hide the numbers from shareholders...Those looking for a substantive deconstruction of the system--and a few ideas to fix it--could hardly do better.
--Ben White (Washington Post )

In Pay Without Performance, Lucian Bebchuk of Harvard and Jesse Fried of Berkeley set out to identify the failure of corporate governance that allows chief executives' compensation to carry on rising with little relation to performance. They point the finger firmly at board directors. (The Economist )

For anyone looking for a guide to the debate over American top pay, this book will be indispensable. It is clear, well-argued, fully researched and deeply felt.
--Michael Skapinker (Financial Times )

Pay Without Performance is a significant book. It is a well-researched, careful study of a problem that has attracted considerable attention since the 1980s. The authors write well and manage at once to make the book readable and to satisfy the scholar's need to see evidence and documentation… Pay Without Performance is an important contribution to the continuing discussion about corporate governance. It will repay a careful reading, and it is likely to achieve the influence it deserves to have.
--Robert G. Kennedy (Ethics and Economics )

This book has important messages about where [the balance between managers, directors, and shareholders] should lie, not just with regard to executive compensation but to governance in general.
--Peter Montagnon (Management Today )

If one has time to read only a single book about corporate governance in US publicly traded companies, this is the book to read.
--James A. Fanto (International Company and Commercial Law Review )

[This book] does add to the discourse about executive compensation and corporate governance by offering an alternative view of the factors underlying executive compensation.
--Joseph Gerakos (Journal of Pension Economics and Finance )

I rate this as an important book that should help to get the academic profession thinking in a new direction. The supporters of the conventional model of compensation clearly have a case to answer, and this book makes it plain what the challenges to developing a better understanding of executive compensation are. Thus, it will surely generate a productive debate...The book should also be seen as a welcome contribution to the corporate-governance debate in Europe, as it provides a sobering perspective on what many regard as a role model. Everybody who wants to participate in the debate on executive compensation should read this book.
--Ernst Maug (Journal of Institutional and Theoretical Economics )

Oliver Hart, Harvard University
Nobody who reads this book will feel quite the same about Corporate America again.

Customer Reviews

Everybody Knows the Game is Fixed: The Poor Stay Poor, the Rich Get Rich...
So sang Leonard Cohen in 1988's "Everybody Knows".

The game of executive compensation, this fascinating study of CEO pay demonstrates, is definitely fixed. In theory, executives are hired by a company's impartial board of directors, who negotiate with them at "arm's lengths". If the CEO of large public owned companies receive huge compensation - and they do - that's because they are worth it. Much of the compensation is tied to the firm and the CEO's performance. Thus the CEO has an incentive to ably serve shareholder's interests. As Gordon Gekko put it (Wall Street (20th Anniversary Edition)): "Greed is Good".

Or so goes the theory.

But everybody knows that the theory is nonsense; Lucian Bebchuk and Jesse Fried's study confirms that common sense perception: That CEO compensation is a game of insiders enriching themselves (and each other) at the outsiders' expense.

Far from being "arm's lengths" negotiators, the directors of a company are more or less stooges of the Firm's CEO. They don't quite serve at his pleasure, but he has ample control. Until the 2003 reforms, while the directors in the "compensation committee" had to be "independent" (that is, not part of the company), the directors on the "nominating committee" that picked the directors were not. Thus the CEO might have sat on, and maybe chaired, the nominating committee. After the Enron scandal and the 2003 reforms, the members of the "nominating committee" have to be independent. But that begs the question - who is an independent director? Well, Independent directors are people who may receive compensation from the CEO controlled company - but no more than 100,000 US dollars a year. And that does not include perks given to family members, donated to charities you favor (or work in), or, with some limitations, to companies you are involved in (p. 28). Director Independence is more of less a sham. And even if it weren't, Directors have little incentive to curb CEO compensation - many of them are or were CEOs themselves. Sometimes it's an "I'll rub your back and you'll rub mine" deal where the CEO of one company is a director of another company who's CEO is a director of his company. At any case, the atmosphere among the directors is friendly, collegial and non-confrontational - as one board member puts it, it's somewhat like a club (p. 32).

There are few effective checks on the powers of CEOs to feast on the shareholder's money. The CEO's compensation is not a large enough issue for the market to respond to, and the Courts generally refuse to intervene in decisions by professional executives and directors.

The best defense against CEO abuse is what Bebchuk and Fried call "outrage" - the bad publicity caused by the discovery of the executives' scandalous self dealing. Outrage does check some of the worst abuses. Fortunately for the CEOs, though, there is a way to give themselves large compensation that is not sensitive to their performance: camouflage. Executives and directors have found ingenious ways of devising gigantic rewards that are hard to recognize as rewards. Whether in the form of perks (such as unlimited use of the corporate jet long after retirement), fat consultancy fees (for which little actual consulting is done), or so-called "split dollar life insurance policies" (don't ask). But the worst offenders are probably the stock options. Until recently, chief executives would get options that were not indexed to the market or the sector -meaning that the executive would benefit from any increase in the company's stock price, even one that he had nothing to do with. And if the share's price went down - no worry, the option's target price would go down as well. "Heads, I win, Tails - I also win".

Fried and Bebchuk paint a gloomy picture of the current state of affairs. They acknowledge that their work is primarily descriptive rather than normative, but they still offer two chapters of solutions.

The first chapter focuses on various reforms, outlawing the most outrageous current schemes. That sounds to me like a good but essentially hopeless idea: No matter how many loopholes regulators would close, CEOs and their directors would always find new loopholes to exploit.

More promising is the final chapter, which focuses on ways to improve corporate democracy. Currently, the firm's directors are more or less immune from challenges by shareholders. Bebchuk and Fried offer reforms that could make them more accountable.

But to what end? The problem of collective action (one shareholder's actions serve the interests of non-active shareholders; this everyone has an incentive to do little) plagues corporations. Could better corporate governance really overcome it? I doubt it.

I wish Fried and Bebchuk would expand their watch to look at executive compensation outside the US, or even in different eras of US history. In The Conscience of a Liberal,Paul Krugman argues that the massive pay to US executives is not inevitable - it is the results of specific political and economic forces in US society. Maybe the US can learn from the experience of others.

Bebchuk and Fried's book is well written and very interesting, even if it is somewhat too detailed and technical for the casual reader. I recommend it if you want to know the nuts and Bolts of what "everybody knows".

Author an academic and not experienced in actual day to day compensation matters
Jesse Fried is a corporate compensation grandstander who seems to show up at every scandal (recently the backdating scandal). Unfortunately it is obvious he has no "real world" management experience!

On Mr. Frieds allegation that stock option expenses are "hidden" by CEOs, corporate types in order to increase their bonus targets:
- CEO compensation (bonus targets etc) are almost NEVER based on non cash expenses, such as stock options expenses. Bonus targets are typically cash flow based only (meaning it doesn't matter to CEO bonus targets if stock options expenses are high or not) and anyone writing a book on executive compensation should KNOW THIS!

On Mr. Frieds allegation that the only possible reason for stock option backdating (without expensing) is to HIDE expenses to the company, presumably to increase the mysterious "bonus targets" above:
- Stock option backdating is used to give a hiring bonus that is only redeemable in 4 years and only if the company continues to perform (reflected in the stock price). The "locked in" and vesting aspects of stock options backdating are the reason they are used, resulting in significant value to company that cash hiring bonuses do not provide. These are not used to hide expenses and anyone who had ever seen these used in a real world setting would know this.

In my opinion, Mr. Fried needs to hire a management consultant who has actually PERFORMED AS A MANAGER before he writes anymore assessments on the state of executive pay.

This Fascinating Read Will Leave You Thinking ...
Other reviewers have made many excellent points. I'll try to avoid duplicating their comments here...

- This book is written by two law school professors. They carefully and precisely make their case. Even as they make their points, they consider possible counter-arguments, and then cite further evidence to answer these objections. They clearly and methodically make their case.

- They start from a somewhat unique set of premises.
--> Whereas many critiques of executive compensation approach the large amounts as an egregious breach of egalitarian values, the authors are indifferent about the size of exec compensation.
--> On the flip side, while many would excuse large compensation packages as necessary to obtain top talent in a tight market, the authors come from a perspective of "if shareholders, as the *owners* of the company, can pay a lot for exec talent, but not get good returns, what's wrong with the market for executive talent?" This book challenges long held assumptions price always equals quality when shopping for top management talent.

- For a book that cites hard economic facts as often as they do, it also does a great job of analyzing the human element of this market to provide insights that seem missing in public debate about executive pay.

- Even as someone who is an outsider both to corporate governance and executive compenation, I found this book accessible and an enjoyable read. As a shareholder of a number of companies, I intend to take opportunities to reform this clearly corrupt system.

Highly recommend this book for everyone who owns shares in a publicly traded company, or works for one.