Weak Solutions to an Illusory Problem

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In Weak Solutions to an Illusory Problem, Professor Steven Kaplan argues that the Bebchuk-Fried analysis is fundamentally flawed because it rests on incorrect assumptions about executive compensation. Kaplan points to empirical work by himself and others that suggests there may be no compensation problem at all. The studies he points to show that compensation tends to rise and fall with the market and that managers are, in fact, rewarded for good performance and punished for poor performance. Kaplan argues that, if anything, the Bebchuk-Fried proposals will add only marginal protections at a high cost: he suggests that their reforms will discourage top talent from serving as executives because it will become significantly riskier to serve at public companies, particularly when lucrative alternatives are available with private-equity-funded firms.

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