Nice Work if You Can Get It

Wall Street Journal
Tyler Cowen
December 23, 2004

Are chief executives paid too much? It is almost a cliché to think so. But how do we know? We read on, for instance, that the head of General Technologies received compensation of about $70 million in 2003, and we wonder whether such a number can possibly be justified. But someone apparently thought so or the pay package would be smaller than it is. How do we go about second-guessing the judgment of corporate boards?

In "Pay Without Performance" (Harvard University Press, 278 pages, $24.95), Lucian Bebchuk and Jesse Fried, two notable legal scholars, argue that CEOs are too often given incentives to pump up short-term earnings at the expense of long-term financial soundness and that CEOs too often get their jobs through over-friendly arrangements with company directors. Indeed, the authors believe that the fundamental practices of American business are rotten to the core.

Their scariest fact concerns CEO firings. A study of 1,000 executives, from 1993 to 1999, found that fewer than 1% resigned or left under pressure because of poor performance. Given the downward-trending stock prices of more than a few companies, it is hard to believe that more than 99% of CEOs are doing a good job. As it happens, many more chief executives of corporate subsidiaries -- with a CEO above them to supervise and judge -- lost their jobs for running things badly over the same time period.