Working Paper: NBER ID: w12798
Authors: Michael S. Weisbach
Abstract: This essay reviews Bebchuk and Fried's "Pay without Performance: The Unfulfilled Promise of Executive Compensation". Bebchuk and Fried criticize the standard view of executive compensation, in which executives negotiate contracts with shareholders that provide incentives that motivate them to maximize the shareholders' welfare. In contrast, Bebchuk and Fried argue that executive compensation is more consistent with executives who control their own boards, and who maximize their own compensation subject to an "outrage constraint". They provide a host of evidence consistent with this alternative viewpoint. \n \nThe book can be evaluated from both a positive and a normative perspective. From a positive perspective, much of the evidence they present, especially about the camouflage and risk-taking aspects of executive compensation systems, is fairly persuasive. However, from a normative perspective, the book conveys the idea that policy changes can dramatically improve executive compensation systems and consequently overall corporate performance. It is unclear to me how effective in practice are potential reforms designed to achieve such changes likely to be.
Keywords: executive compensation; managerial power; corporate governance
JEL Codes: G3; J4; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| managerial control (M54) | compensation outcomes (M52) |
| public perception of pay (J31) | executive compensation (M12) |
| camouflage in compensation practices (J33) | public outrage (D73) |
| managerial power (M54) | compensation structures (M52) |
| executives maximizing pay under outrage constraint (M12) | compensation structure (M52) |