I am doing my final paper on executive compensation and I found this book very interested and informative. Pay without Performance, by Lucian Bebchuk and Jesse Fried, portrays the executives’ power to influence their own pay, and points out the structural defects in corporate governance that give them this power. This book provides examples how boards have persistently failed to negotiate at arm’s length with the executives they are meant to oversee.

The authors show that flaws in pay arrangements and the pay-setting process have been widespread and systemic. These problems have hurt shareholders both by increasing pay levels and, even more importantly, by leading to practices that dilute and distort managers’ incentives.

The most important change in corporate structure in United States has been the shift of authority from stockholders and their directors to management. From management authority comes control of management compensation and certain level of compensation expectation. Managers’ influence has distorted executive pay.

In addition, Pay without Performance shows correlation between compensation and familiarity. Many independent directors have some prior social connection to, or are even friends with, the CEO or other senior executives. Even directors who did not know the CEO before their appointment may well have begun their service with a sense of obligation and loyalty to CEO. The CEO often will have been involved in bringing the director on the board – even if only by not blocking the directors nomination. With such a background, directors often start serving with a reservoir of good will toward the CEO, which will contribute to a tendency not to bargain aggressively with the CEO over pay.

By studying pay arrangements, Bebchuk and Fried open a window through which they identify some basic problems with our reliance on boards as guardians of shareholder interests. And the solution, the authors argue, is not merely to make boards more independent of executives but to make boards more dependent on shareholders. This book points out the ways to restore corporate integrity and improve corporate performance, while powerfully critiquing the executive compensation and corporate governance.

What I also found very interesting is that this book reveals data of exponential growth in executive compensation over the recent decades. For example, in 1991, the average large company CEO received approximately 140 times the pay of an average worker; in 2003, the ratio was about 500:1.

I believe that many of you would find this book appealing due to its relevant topic, alarming data, and offered solutions for controlling executive compensation.

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5 responses »

  1. Mike says:

    This seems like a very interesting book, not just with the solutions the author proposes, but also with the data collected. The CEO:worker ratio statistic is unbelievable for just 12 years. I don’t doubt its accuracy though. I like the author’s suggestion to “make boards more dependent on shareholders.” It seems the problems arise from the upper management culture. Board members, CEOs, and other similar positions seem to have an exclusive community of their own who have the power to protect each other and themselves by keeping themselves at the top. Having the board dependent on those below them would create a more fair system in my opinion.

  2. Marko says:

    I tend to agree with you. In the past, being a leader was a huge burden that not many were willing to take. These days, executives behave like they are drunk from power. They are more independent, less cautious, more willing to take severe risk and engage into questionable behavior. Reorganization of the corporate culture is necessary in order to limit executive power and compensation.

  3. Jordi says:

    I’d say “damning data..” One interesting book I keep meaning to read is by Rhakesh Khurana, Searching for the Corporate Savior. I think it is related in a subtle, cultural way to the Pay without Performance phenomenon. They are both rooted in some really whacky, super-human expectations about what a CEO can do.

  4. Marc says:

    These figures are pretty intense. When I was doing research about this week’s Google case, I saw that their ex-CEO just moved into a new position as executive chairman, which came with a pay raise of around $101 million. While this includes stock options and benefits, it still seems a little crazy. I’m sure that these executives are important to their companies, but the compensation they are getting is ridiculous.

  5. […] to class — Brooke (The Hunger Games); had already read Most enlightening — Marc H. Best find for your paper – Marko Best post with a newfound book – Jeff Inversely proportional title and post […]

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