Research Handbooks in Corporate Law and Governance series
Edited by Randall S. Thomas and Jennifer G. Hill
Chapter 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 understanding 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 directors. This was done by making remuneration of executives dependent upon certain performance 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 performancebased 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 was, first, that many companies increased non-performance-based cash compensation to $1 million and then began to add...
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