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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. Professors 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 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, enhancing shareholder welfare 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, in improving the corporate governance apparatus in the executive compensation area, the better remedy is not a wholesale expansion of shareholder power, but a tailored series of measures designed to bolster the independence 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, itemize, and summarize all compensation elements for each senior executive, providing bottom line analysis and then a justification by the compensation committee of the compensation paid. This process of "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, serious thought should be given to a shareholder approval vote on the CD&A, following the new United Kingdom practice.


Banking and Finance Law | Business Organizations Law | Law | Securities Law