Abstract
In their new book, Pay without Performance: The Unfulfilled Promise of Executive Compensation, Lucian Bebchuk and Jesse Fried describe in detail the performance insensitivity of today's executive incentive compensation packages. The authors assert that managers possess and effectively wield power, assuring that so-called incentive pay comes on easy terms. Kevin Murphy and Michael Jensen, who together provided crucial academic impetus for the 1990s movement to equity based compensation, along with other economists, respond in defense of prevailing practice. This review of Pay without Performance reports on the state of play in this academic tournament. It finds that even as both sides score points, significant concessions have been accreting on the defensive side. The result is a clear victory for Bebchuk and Fried. They win the match when the defense acknowledges that management power matters. The concession changes the terms of discourse in a field that expunged the concept of power from its positive account more than two decades ago. With power back in the positive account, the burden of persuasion shifts from the critics to the defenders of prevailing practices. The question then turns to whether prevailing pay practice can be improved materially. When the answer turns out to be yes, the debate ends in favor of Bebchuk and Fried.