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• W3122670181 abstract "I have read Pay without Performance.1 It is a major undertaking. Its lengthy chapter notes and voluminous references attest to both the quality and quantity of work undertaken by its authors. My careful reading was a valuable learning experience. While it contains many useful suggestions, in the end, I was not convinced either by the statement of the problem of executive compensation (by which the authors seem mainly to mean the amount of CEO compensation) or by the major solution proposed by the authors of giving shareholders easy access to the ways and means of electing directors. I have a few points to make about the book. With the remaining time allotted, I would then like to advance a different perspective on executive compensation arrangements. In the introduction, the authors state that the dominant paradigm for executive compensation assumes that pay arrangements are the product of bargaining between executives and the board.2 This assumption informs the whole book. The authors are at their best in showing that this assumption is false.3 I agree with them, because it is an assumption that could never be, or have ever been, made by anyone closely familiar with how executive compensation is set. An arm's-length transaction, as readers of Black's Law Dictionary will know, is a transaction negotiated by parties, each acting in his own self-interest. A salesperson for a Saturn trying to sell a car to a doubting customer, depicted in the TV ad run on NBC during the Olympics, captures the essence of an transaction. The trouble with trying to apply this concept to the corporate scene is that the CEO and the board are not unrelated parties. They are tightly related within the corporation, affiliates thrown together for a long time, who share fiduciary duties to shareholders. The authors seem to believe that the measure of a bargain resulting from a board acting solely in the interests of the corporation and its shareholders can only be a bargain struck at arm's-length. I disagree. It is a fact that managerial power exists and asserts itself in bargaining over CEO compensation. Since the CEO and the board must work together after the bargain is struck, as the Saturn salesman and his customer do not, something less than bargaining is going to occur. But that does not mean the results will not represent the board's good faith effort to serve shareholder interest. Compared to an bargain, what the board achieves will likely be more generous to the CEO. Money may be left on the table. And, yet, the best interests of shareholders may have been served. A good bargain is one that builds a platform on which the board and management can work together in the best interests of the corporation, and be comfortable and secure in doing so. In place of the Saturn salesman, assume a brain surgeon, who you are asking to operate on your head. I wonder how often you try to bargain at with such a person? Would doing so be in your best interest? Are you more interested, at that moment, in the welfare of your pocketbook or your head? You and the surgeon have an ongoing relationship to carry forth. So, too, does the board with the CEO. So, the authors are convincing in proving that the paradigm isn't what directors actually do. I am sympathetic to their assertion that bargaining is missing from new hires as well as from continuing ones. But that's the easy part. The next step they take goes too far. The authors seem to assume that because there is no bargaining, directors consistently favor executives at the expense of shareholder interest. The evidence for this claim, on which the whole thesis of the book rests, is found in the large number of cases where, with the benefit of hindsight, one can reasonably conclude that CEO performance was undeserving of CEO pay. The problem is that there appears to have been no effort to identify cases where, again with the benefit of hindsight, one could reasonably conclude that CEO performance was purchased at a bargain. …" @default.
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• W3122670181 date "2005-07-01" @default.
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• W3122670181 title "A Real World Critique of Pay without Performance" @default.
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