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I. INTRODUCTION
Professors Lucian Bebchuk and Jesse Fried have written a timely, thoughtful and provocative book that is bound to become influential.' The authors put forward a simple hypothesis of what is wrong with executive pay: CEOs have too much power over their boards. Compensation contracts are not negotiated at arm's-length as they would be if shareholders were at the bargaining table, because board members care more about their standing with the CEO than with the shareholders. The lack of arm's-length bargaining has resulted in excessive pay levels, weak pay-for-performance relationships, and inefficient forms of pay.
The bulk of the book is devoted to evidence of excessive executive power and lack of arm's-length bargaining. The authors show that once we look at executive pay through the power lens many of the anomalies of executive compensation prove to be ills stemming from a flawed pay-setting process. The authors argue that the process cannot be rectified merely by making boards less dependent on the CEO, as recent regulatory changes have tried to do; boards also have to become directly accountable to the shareholders. This leads to the book's bottom line: in order to fulfill the promise of executive compensation, shareholders should be given real say in how the corporation is governed by giving them extensive decision rights, including the right to determine who sits on the board, what kind of corporate charter the company should have, where the company should be incorporated, and so on.
The idea of looking at executive pay from a broader design perspective is excellent. Incentive theories often focus on what is ideal under unrealistic assumptions about how those ideals might be implemented. I also agree with several of the criticisms that the book levies on current executive compensation arrangements, especially the apparent tendency to distort pay schemes in order to camouflage the total cost of the package or distort it in order to circumvent regulations. Transparency, as argued by the authors, is a high priority even if it has its own costs, as I will discuss later. Another important change advocated by the authors is to make incentive pay less liquid by increasing the length of the holding periods and preventing executives from timing the sale of their shares strategically, as...