Pay Without Performance: The Unfulfilled Promise of Executive Compensation the Unfulfilled Promise of Executive Compensation

by Lucian Bebchuk and Jesse Fried

Book Overview

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... This description may be from another edition of this product.

• Format: Hardcover
• Language: English
• ISBN: 0674016653
• ISBN13: 9780674016651
• Release Date: November 2004
• Publisher: Harvard University Press
• Length: 304 Pages
• Weight: 1.20 lbs.
• Dimensions: 1.1" x 6.2" x 9.6"

Customer Reviews

Business owners know how much their employees are making

Small business owners know exactly how much their employees are making to a penny. But when it comes to owning stocks, these same individuals do not have the slightest clue how much the managers of the companies that they own make. Executive compensation is not as simple as the compensation for lower level employees because executive compensation includes salary, bonuses, stock options, and so on. This book makes executive compensation clearer. I highly recommend it to all investors. - Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

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. <br />--> 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. <br /> <br />- 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. <br /> <br />- 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. <br /> <br />Highly recommend this book for everyone who owns shares in a publicly traded company, or works for one.

Fantastic Resource on Corporate Culture Run Amok

Superb exposé on the appalling lack of ethical fortitude amongst our country's business elite--namely the chief executives, their officers, and sadly those given the responsibility for representing the shareholders' interests, the directors. The adage "no one looks after your money like you do" is well-remembered by the reader of "Pay without Performance." Primarily due to a phenomenon know as "interlocking" executives cross-pollinate their respective boards with a surprisingly shallow gene pool leaving the ordinary shareholder hardly independently represented at all. Bebchuk and Fried do well by illustrating the mockery known as "independent compensation committees" when these committees are typically hired under the corporation's own HR department usually by CEO referral. Tough to place credence in any recommendation so biased from the outset! Now only two years after the publication of this book, and several studies cited therein, the SEC has launched a sweeping probe into options timing--in particular boards who allowed their executives to cherry-pick the grant dates of options to take advantage of inside information to profit at the expense of shareholders at large. Criminal, yet condoned by far too many corporate "leaders." Ultimately the question arises--Is the solution for shareholders to vote via increased legislation or with their wallet by only investing in corporations fully aligned with their interests? The authors make an excellent case for instituting a performance-based compensation system as well as supporting the role of making directors truly independent and not pawns of the CEO. Fantastic resource on corporate culture run amok--the elusive 5 Stars!

Excellent. The authors deliver a strong performance.

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.

Thoughtful Analysis But Remedies Need More Work

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