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Optimal Executive Compensation versus Managerial Power: A Review of Lucian Bebchuk and Jesse Fried's Pay without Performance: The Unfulfilled Promise of Executive Compensation

  • Michael S. Weisbach

This essay reviews Lucian A. Bebchuk and Jesse M. 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. The book can be evaluated from both positive and normative perspectives. 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 potential reforms designed to achieve such changes are likely to be in practice.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jel.45.2.419
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Article provided by American Economic Association in its journal Journal of Economic Literature.

Volume (Year): 45 (2007)
Issue (Month): 2 (June)
Pages: 419-428

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Handle: RePEc:aea:jeclit:v:45:y:2007:i:2:p:419-428
Note: DOI: 10.1257/jel.45.2.419
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  1. Bebchuk, Lucian Arye & Fried, Jesse, 2003. "Executive Compensation as an Agency Problem," CEPR Discussion Papers 3961, C.E.P.R. Discussion Papers.
  2. Lucian Arye Bebchuk & Jesse M. Fried & David I. Walker, 2002. "Managerial Power and Rent Extraction in the Design of Executive Compensation," NBER Working Papers 9068, National Bureau of Economic Research, Inc.
  3. Lucian A. Bebchuk & Jesse M. Fried, 2005. "Pay Without Performance: Overview of the Issues," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(4), pages 8-23.
  4. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
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