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There are many terrific things to say about Lund's paper.  Ignoring some good advice about how to give comments, I will focus this response on a few criticisms, none fatal.

First, Lund argues that neither "theory or evidence" explains shareholders' discipline of losing firms and complacency regarding winning firms.  He denies that there are cognizable constraints on high pay -- "shareholders should be neutral to bullish regarding total compensation even at otherwise extraordinarily high levels."  Though he at first attributes shareholders' bundling to "inchoate intrafirm populism," "hedging," or error, Lund ultimately settles on a more concrete and novel explanation:  shareholders do not wish to offend executives with negative votes after positive performance.

I suppose this is plausible, but it felt to me like a bit of a just-so story. As Lund points out, executives are "more narcissistic as a class than others," winners of a tournament in which each level made them feel even more convinced that they were destined to succeed all along. It is not clear to me how a CEO would take a negative "say of pay". Perhaps they would be "humiliated." But perhaps they would simply shrug it off -- a constraint that great men face which must be managed.  Such uncertain application of main-effect experimental findings are an important limit on what Donald Langevoort has called "clinical" behavioral psychology. And there is little evidence support Lund's position -- even anecdata on UK CEO tantrums is missing from the paper. Far more significantly, I don't know why would attribute to shareholders such a sophisticated and psychologically nuanced theory of the CEO mind. Indeed, I bet shareholders don't think all that much about the actual executive's reaction to their decision, which, after all, must be aggregated with others to have any social meaning. In politics, voters don't often think about how their preference for candidate A will make candidate B feel; they vote their hopes, dreams, fears and pocketbooks. This doesn't conflict at all with Lund's point that CEOs are becoming more identified with their firms, and that CEO behavior matters for the firm's value. The point is that most people are relatively bad at knowing how others will react to their decisions. We mispredict in casual interactions, with our significant others, with our friends, our students, our mentors. Why would be any better when thinking about how a CEO of a firm that did well would respond to our vote on pay? Maybe we'd think it would spurr the CEO to greater efforts. Or signal that she was great, but not the greatest.

Lund could strengthen the paper by adding discussion regarding how social norms and ordinary psychology motivate our views about how to pay executives.  Check out Harwell Well's terrific history piece, "'No Man Can Be Worth $1,000,000 a Year':  The Fight Over Executive Compensation in 1930s America" for a sense of how such anti-reward norms used to be expressed. Additionally, prospect theory classically teaches that we find losses more aversive than gains, therefore it would make sense that we both pay more attention to them and punish failure executives more than we reward ones that succeed. That's true although, as Lund points out, "there is little evidence that institutional shareholders or proxy service firms feel pay-for-performance is conceptually limited to the avoidance of pay-for-failure." Such firms are aggregating the preferences & biases of their employees, and loss aversion is particularly difficult to debias, even in an institutional framework. Quite obviously, my preferred explanations do not detract from Lund's bundling argument -- they strengthen it. I do think that shareholders are likely to monitor more carefully when firms underperform, and the result is that high-performing firms will be less constrained (than they ought to be) by say on pay mechanisms. To the extent you think those mechanisms worthwhile, this is a problem in need of a solution. Perhaps Lund's ex ante proposal is right one. Because this response has gone on a bit long already, I'll leave that analysis to others, and look forward to the discussion!

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