Pay without Performance: The Unfulfilled Promise of Executive Compensation (Hardcover)

~ Lucian Bebchuk (Author), Jesse Fried (Author)

Editorial Reviews

Review

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

I agree enthusiastically and almost completely with [Bebchuk and Fried's] analysis of the problem." -- Arthur Levitt, Jr., former SEC chairman

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

This is a book that must be read...by any citizen who cares about our society. -- John C. Bogle, Founder, The Vanguard Group

This literate and learned book is for all who wish to learn the facts and consequences [of management’s control]. -- John Kenneth Galbraith

Those looking for a substantive deconstruction of the system—and a few ideas to fix it—could hardly do better. -- Ben White, The Washington Post, December 5, 2004

[This] 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

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 )

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Product Details

• Hardcover: 304 pages
• Publisher: Harvard University Press (November 22, 2004)
• Language: English
• ISBN-10: 0674016653
• ISBN-13: 978-0674016651
• Product Dimensions: 9.2 x 6.3 x 1.1 inches
• Shipping Weight: 1.2 pounds (View shipping rates and policies)
• Average Customer Review: 4.2 out of 5 stars  See all reviews (9 customer reviews)
• Amazon.com Sales Rank: #773,706 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

14 of 16 people found the following review helpful:

5.0 out of 5 stars Thoughtful Analysis But Remedies Need More Work, November 21, 2004

By	Laurence Stybel "Boardoptions.com" (Boston, MA USA) - See all my reviews (REAL NAME)

In his letter to Berkshire Hathaway investors in 2004, Warren Buffett wrote:

"In judging whether Corporate America is serious about reforming itself, CEO pay remains the acid test. To date, the results aren't encouraging."


PAY WITHOUT PERFORMANCE expands on Buffett's comments and provides a research base to support it. The authors also suggests what needs to be done to effectively deal with this "acid test" of corporate reform.

Lucian Bebchuck is the William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance at the Harvard University School of Law. He is also a Research Associate of the National Bureau of Economic Research. Bebchuck has a doctorate in economics from Harvard and a law degree from Harvard. Jesse Fried is Professor of Law at the Boalt School of Law at the University of California at Berkeley. Prior to his academic career, he practiced tax law in Boston. Fried holds degrees in economics and law from Harvard University.

The authors argue that Sarbanes Oxley reforms may have marginally improved the independence of Boards from CEOs. But Board members are still not dependent enough upon the shareholders they are supposed to represent. This dysfunctionality in the system makes it impossible for Compensation Committees to conduct true "arms length" compensation discussions with CEOs.

The result is a CEO compensation system that tends to verbalize pay for performance without actually achieving it for CEOs.

When CEO pay is uncoupled from performance, Board members seek to avoid having to pay "outrage costs" from the shareholders. One of the ways of avoiding paying "outrage costs" is to make it difficult for the average shareholder to truly understand the level of CEO compensation and how that level is unrelated to corporate performance. The authors call these techniques compensation "camouflage."

The authors are quite clear in describing examples and providing research to support their ideas.

They propose remedies that focus on two themes: tying CEO compensation to real corporate performance and tying Boards to shareholders.

With respect to tying CEO compensation to real corporate performance, they would seek to remove "windfall" and "rising tide" factors from CEO bonus/option payments. Windfall factors involve one-time rises in shareholder value. An example might include a sharp rise in stock value because the CEO makes a decision to downsize or receives a large payment from the successful settlement of a law-suit. Another windfall factor might be allowing accounting for revenue to move from one quarter to the next so that the stock will look like it is rising at a steeper angle. "Rising tide" factors would factor out increases in CEO compensation because an average company is benefiting from average industry growth that impacts all average players. These issues merit serious consideration from Compensation Committees. And Warren Buffet is correct in his assessment that most Boards have thus far failed the "acid test."

With respect to tying Boards to shareholders, the authors would terminate staggered Board elections. They would have the entire Board be up for election at the same time. I am reasonably sure that the authors' remedy here would be worse than the disease they are seeking to cure.

A Board of Directors is a work group that is supposed to be thoughtful and deliberative in nature. Their proposal would make the Board a far more responsive body at the expense of thoughtfulness. To make an analogy, the U.S. Senate is a more effective deliberative body because it is less subject to the passions of the moment. And it is less subject to the passions of the moment because only 33% of its members are up for election every two years. The U.S. House of Representative is far less effective as a deliberative body. And one of the reasons is that all members are accountable to the voters every two years.

Regardless of whether you agree or disagree with their analysis, their key theme deserves consideration: if Boards allow CEO pay to be unrelated to corporate performance, it is important to define the problem correctly. The problem is not about greedy or lazy individuals. The problem is about a system that is not rewarding leaders for doing the right things.

As Warren Buffet has said, fixing that system will be the "acid test" of the free enterprise system in the 21St Century.

Larry Stybel
www.boardoptions.com
[e-mail]

3 of 3 people found the following review helpful:

5.0 out of 5 stars This Fascinating Read Will Leave You Thinking ..., August 7, 2006

By	Ramulin (Seattle, WA, USA) - See all my reviews

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.

3 of 3 people found the following review helpful:

5.0 out of 5 stars Excellent. The authors deliver a strong performance., May 9, 2005

By	Gaetan Lion - See all my reviews (TOP 500 REVIEWER)    (REAL NAME)

This is an excellent book. The authors have done extensive research from both a legal and economic standpoint to support their hypothesis that companies with better Board governance, more accountable CEOs, better structured CEO compensation packages perform much better than the others. They show better operating performance resulting in superior shareholder value creation over the long term.

Their diagnostic of what ales executive compensations are so well grounded they have become common knowledge for any readers of the financial press over the past couple of decades. Compensation of CEOs and other top officers has become insane. The structure of equity compensation has become so tilted in the CEOs favor that as the authors indicate they really don't have to perform. If they perform poorly they make a boatload of money. If their performance is about average they make an astronomical amount of money. What kind of pay-for-performance is this?

Other reviewers have had surprisingly strong reactions to the authors' proposals to redress the effectiveness of executive compensation. I found that surprising given that the authors' proposals are not that radical to begin with. They boil down to restructuring equity compensation so they reflect targets and vesting periods that make economic sense and align the economic interest of the executive with the long-term interest of shareholders. Their proposals also entails a massive shift of power from entrenched Board members plagued with serious conflict of interest to the shareholders of the companies who are the ones bearing the full brunt of the equity risk. In the days of the Enron, Tyco International, Arthur Andersen recent scandals, I find the authors recommendations rather sound. I do think a shift from Board to shareholder power would do a good deal to restore the integrity of certain executives, the transparency and the quality of accounting and financial disclosure.

Thus, I really think you will enjoy and learn a lot from this book. In a similar fashion, if you want to educate yourself regarding how movie stars are paid, and why just like CEOs they may be grossly overpaid I strongly recommend the recently released book "The Big Picture" by Edward Jay Epstein. This is another fascinating point that touches on the sensitive topic of a privilege group that earns a staggering amount of money hardly justifiable on any grounds.