Winter, Jaap --- "Corporate Governance Going Astray: Executive Remuneration Built to Fail" [2012] ELECD 608; in Thomas, S. Randall; Hill, G. Jennifer (eds), "Research Handbook on Executive Pay" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on Executive Pay

Editor(s): Thomas, S. Randall; Hill, G. Jennifer

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849803960

Section: Chapter 10

Section Title: Corporate Governance Going Astray: Executive Remuneration Built to Fail

Author(s): Winter, Jaap

Number of pages: 18

Extract:

10 Corporate governance going astray: executive
remuneration built to fail* 1




Jaap Winter


1 BONUSES OF CONTENTION

Most of the modern academic thinking on corporate governance starts from the under-
standing that in public companies with dispersed ownership an agency relation exists
between the managers as agents whose decisions affect the shareholders as principals.
Corporate governance and underlying company law mechanisms are very much about
addressing the issues triggered by this relationship, seeking to ensure that managers act
in the interests of shareholders. Classic company law tools such as appointment and
dismissal rights, disclosure, monitoring through supervisory or non-executive directors,
can all be seen as mechanisms that aim to address the agency problems. A relatively new
corporate governance mechanism, introduced in the 1990s, is to align the interests of
managers with the interests of shareholders through the remuneration of executive direc-
tors. This was done by making remuneration of executives dependent upon certain per-
formance targets having been met and by paying executives in stock options and shares
of the company.
Scholars in the US claimed that the problem of executive remuneration was not that
CEOs received too much pay, but that their pay was not related to the performance of
companies (Jensen and Murphy 1990). The US government stimulated performance-
based pay in 1993 by providing that non-performance-related compensation in excess of
$1 million was no longer deductible as an ordinary business expense for corporate income
tax purposes (Omnibus Budget Reconciliation Act of 1993). The result ...