The Partner-Manager: Some Thoughts on Bebchuk and Fried

In the forthcoming University of Pennsylvania Law Review paper The Partner-Manager: Some Thoughts on Bebchuk and Fried, which comments on Lucian Bebchuk and Jesse Fried, “Paying for Long-Term Performance” [U. Pa. L. Rev., Vol. 158, p. 1915-1959, 2010], I argue that this work, and their work on executive compensation more broadly, addresses the symptoms of excessive compensation without examining or taking account of the deeper structural changes that compensation practices have led to in the broader context of corporate governance. The American history of the role of senior corporate executives reveals an evolution, from entrepreneurial leadership in early industrialism to the rise of the professional manager, as described by Alfred Chandler. A third stage of evolution has taken place over the last twenty years. That is the shift from professional manager to what I call the “partner manager,” at least at the highest executive levels.

The dramatic rise in stock compensation that has occurred during this third stage has led senior executives to see their compensation in terms of percentages of the corporation’s equity instead of the more traditional salary and performance bonus. Although this phenomenon is most dramatic in the banking industry—and especially the investment banks—it is also manifests in nonfinancial corporations. This observation raises questions about the accepted model of corporate governance, the actual rather than formal role of senior executives, and the reform implications of the phenomenon.

No scholars have done more than Bebchuk and Fried to identify the problem of executive compensation and propose comprehensive solutions. While their analysis and reform suggestions are well-done and largely persuasive, the larger structural issue underlying their work needs to be addressed to determine the desirability of the underlying model both from a macroeconomic and microeconomic perspective and the possible need for reform at a deeper level. The argument is briefly made, and issues for further research are raised.

The full paper is available for download here.