TY  - JOUR
AU  - Weisbach,Michael S.
TI  - Optimal Executive Compensation vs. Managerial Power: A Review of Lucian Bebchuk and Jesse Fried's "Pay without Performance: The Unfulfilled Promise of Executive Compensation"
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12798
PY  - 2006
Y2  - December 2006
UR  - http://www.nber.org/papers/w12798
L1  - http://www.nber.org/papers/w12798.pdf
N1  - Author contact info:
Michael Weisbach
Department of Finance
Fisher College of Business
Ohio State University
2100 Neil Ave.
Columbus, OH  43210
Tel: 614 292 3264
E-Mail: weisbach.2@osu.edu
AB  - 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.  

The 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.
ER  -