Columbia Public Law & Legal Theory Working Papers

Document Type



Journal of Corporation Law, 2005


High levels of executive compensation have triggered an intense debate over whether compensation results primarily from competitive pressures in the market for managerial services or from managerial overreaching. Profs. Lucian Bebchuk and Jesse Fried have advanced the debate with their recent book, Pay Without Performance: The Unfulfilled Promise of Executive Compensation, which forcefully argues that the current compensation levels are best explained by managerial rent-seeking, not by arm's length bargaining designed to create the optimum pay and performance nexus. This paper expresses three sorts of reservations with their analysis and advances its own proposals. First, maximizing shareholder value is not, as a positive or normative matter, a sufficient framework for understanding the controversy or devising a remedy. Second, many of the compensation practices identified by Bebchuk and Fried as veritable "smoking guns" of managerial power may have benign explanations. Third, even accepting that the present corporate governance apparatus needs improvement in the executive compensation area, the better remedy is not a wholesale expansion of shareholder power, but a tailored serious of measures designed to bolster the independence in fact of the compensation committee. Most important, the SEC should require proxy disclosure of a "Compensation Discussion and Analysis" statement (CD&A) signed by the members of the compensation committee (or by the responsible independent directors for firms without a compensation committee). Such a CD&A ought to collect and summarize all compensation elements for each senior executive, providing bottom line analysis. This process "ownership," reputation-staking, and publicity will strengthen the committee's hand against managerial pressure and will elicit both shareholder and public responses that necessarily contribute to the compensation bargain. In addition to the CD&A, serious thought should be given to a shareholder approval vote on the CD&A, following the new UK practice.

Date of Authorship for this Version

March 2005


Executive compensation, corporate governance, stock options