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Bebchuk and Fried on Executive Compensation

Lucian Bebchuk and Jesse Fried's book Pay Without Performance is an important critique of current corporate executive compensation law and practice. In a recent article, they offered a precis of the arguments made in the book.

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.

I reviewed the book at length for the Texas Law Review and more concisely in a TCS column. My bottom line?

I have argued that the managerial power model was never a complete explanation of what is going on with executive compensation. In addition, I note that we've already seen important reforms that promise to significantly constrain both managers and directors. The bottom line thus is that we should wait and see what happens next before rushing forward with more changes in the law.