Executive Compensation: Who Decides? PAY WITHOUT PERFORMANCE: THE UNFULFILLED PROMISE OF EXECUTIVE COMPENSATION. By Lucian Bebchuk[dagger] and Jesse Fried.[dagger][dagger] Cambridge, MA: Harvard University Press, 2004. Pp. xii, 278. $24.95.
U.S. corporate law vests control of the corporation in the board of directors and those executives to whom the board properly delegates decisionmaking authority.1 The discretionary powers thus conferred on directors and officers, however, are to be directed towards a single end; namely, the maximization of shareholder wealth.
A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end . . . .2
In practice, corporate governance all too often departs from this ideal model with respect to both means and ends. As to means, the statutory model of director primacy often gives way to a reality of management domination. The directors become mere figureheads who rubberstamp decisions made by senior management. The widespread phenomenon of the "Imperial CEO" is but the latest manifestation of this perversion of the statutory scheme.3
As for the ends, the managers who control the corporation are inevitably tempted to put personal interest ahead of shareholder wealth maximization. In particular, as executive compensation has spiraled up in the last couple of decades, many observers believe that top corporate managers are benefiting themselves at the expense of shareholders.4 This view finds two able advocates in law professors Lucian Bebchuk and Jesse Fried, who develop this argument in their new book, Pay Without Performance? They forcefully contend that "managers have used their influence [over corporate boards of directors] to obtain higher compensation through arrangements that have substantially decoupled pay from performance."6 In other words, the executive compensation scandal is not the rapid growth of management pay in recent years, as too many glibly opine,7 but rather the failure of compensation schemes to award high pay only for top performance.8
Bebchuk and Fried begin Pay Without Performance by setting up a foil against which the remainder of the book will argue-namely, those financial economists who contend that "despite some lapses, imperfections, and cases of abuse, executive [compensation] arrangements have largely been shaped by market forces and boards loyal to shareholders."9 The first four chapters of the book are thus devoted to knocking down the proposition that management pay is an efficient product of arm's-length bargaining between the board of directors and senior managers.
The second major chunk of the book (Chapters 5 and 6) develops Bebchuk and Fried's opposing thesis, which they label the "managerial power" perspective. They claim that "directors have been influenced by management, sympathetic to executives, insufficiently motivated to bargain over compensation, or simply ineffectual in overseeing compensation."10 As a result, executive pay has greatly exceeded the levels that would prevail if directors loyal to shareholder interests actually bargained with managers at arm's length.
The third major section of the book constitutes the bulk of the text, marching relentlessly through one form of executive compensation after another. Moving from severance payments (Chapter 7) to the ease with which managers may cash out equity-based compensation (Chapter 14), Bebchuk and Fried tell a consistent story of how management influence taints and distorts the compensation process. Although they frequently refer to theoretical models and empirical studies that support their argument, this section was clearly written with a lay reader in mind. Bebchuk and Fried's efforts in this regard are quite successful; they have produced a highly accessible indictment of executive compensation practices. …