What Corporate-Governance Reforms Are Still Necessary?

One key area of corporate governance that still needs substantial reform is executive compensation, which remains insufficiently sensitive to performance and not transparent enough to investors.

As Jesse Fried and I discuss in our book Pay Without Performance: The Unfulfilled Promise of Executive Compensation (Harvard University Press, November 2004), existing pay arrangements have significant and widespread flaws that are costly for both investors and the economy. The aggregate compensation paid by public companies to their top-five executives from 1993 through 2002 was about $250 billion. That aggregate compensation was equal to 10% of aggregate corporate earnings in 1998 through 2002, up from 6% from 1993 through 1997. If compensation could be reduced without weakening managerial incentives—and we show it could—the direct gains to investors would have real, practical significance.

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