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Pay Without Performance: The Unfulfilled Promise of Executive Compensation Hardcover – 2 Nov 2004


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Product details

  • Hardcover: 304 pages
  • Publisher: Harvard University Press (2 Nov. 2004)
  • Language: English
  • ISBN-10: 0674016653
  • ISBN-13: 978-0674016651
  • Product Dimensions: 24.3 x 15.7 x 2.7 cm
  • Amazon Bestsellers Rank: 1,347,647 in Books (See Top 100 in Books)

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Review

Clear, well-argued, fully researched and deeply felt. -- Financial Times, 7 February, 2005

About the Author

Lucian Bedchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance at Harvard Law School. Jesse Fried is Professor of Law at the Boalt Hall School of Law, University of California, Berkeley. --This text refers to the Paperback edition.

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Amazon.com: 11 reviews
14 of 17 people found the following review helpful
Thoughtful Analysis But Remedies Need More Work 21 Nov. 2004
By Laurence J. Stybel - Published on Amazon.com
Format: Hardcover
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

[...]

lstybel@boardoptions.com
4 of 4 people found the following review helpful
Excellent. The authors deliver a strong performance. 9 May 2005
By Gaetan Lion - Published on Amazon.com
Format: Hardcover
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.
4 of 4 people found the following review helpful
This Fascinating Read Will Leave You Thinking ... 8 Aug. 2006
By R - Published on Amazon.com
Format: Hardcover
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.
14 of 18 people found the following review helpful
Great analysis; flawed reform proposals 25 Dec. 2004
By Stephen M. Bainbridge - Published on Amazon.com
Format: Hardcover
I have been reading Pay Without Performance: The Unfulfilled Promise of Executive Compensation by (Harvard law professor) Lucian Bebchuk and (Boalt law prof) Jesse Fried. Bebchuk and Fried take issue with the standard academic account of executive compensation, which goes something like this: Executive compensation is a classic agency cost problem. Although CEOs and other executives are agents of the corporation and its shareholders, they have incentives to shirk. Indeed, they have incentives to behave opportunistically - i.e., to maximize their own wealth and perks at the expense of their shareholder principals. Accordingly, executive compensation schemes must be designed in ways that constrain shirking and opportunism; in other words, executive compensation schemes should strive to align executives' interests with those of the shareholders. In the literature, this usually leads to a recommendation of some sort of performance-based pay scheme, typically entailing the use of stock options.

Bebchuk and Fried do a good job of explaining why executive compensation schemes fail adequately to align managerial and shareholder interests. In brief, they make the very sensible point that managerial influence over the board of directors taints the process by which executive compensation is set. In other words, the system by which agency costs are to be checked is itself tainted by an agency cost problem.

I get off the boat, however, when it comes to the solution. Bebchuk and Fried want to displace the time-tested corporate governance system of director primacy with an untested new system based on shareholder primacy. As regular readers of my academic work know, this is anathema in my book. (I'm writing a review of their book for the Texas Law Review, which will focus on this point, and which should be available on [...] in a month or two.)

Having said that, however, Bebchuk and Fried are to be praised for having written a book that makes highly technical doctrinal and economic analysis accessible to the educated lay reader, while not dumbing down some very sophisticated analysis. As a result, the book remains useful to the specialist as well. It is definitely a book that anyone interested in corporate governance and executive compensation ought to own.
2 of 2 people found the following review helpful
Fantastic Resource on Corporate Culture Run Amok 20 Jun. 2006
By Scuba Diver - Published on Amazon.com
Format: Hardcover
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!
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