Research Handbooks in Corporate Law and Governance series
Edited by Randall S. Thomas and Jennifer G. Hill
Chapter 11: Regulating Executive Remuneration After the Global Financial Crisis: Common Law Perspectives
Jennifer G. Hill1 1 INTRODUCTION Executive pay has become a regulatory flashpoint of the global financial crisis. In contrast to the traditional non-interventionist approach to executive remuneration, it has galvanized regulators around the world to search for effective responses to the perceived problem of executive remuneration. Executive remuneration first became a prominent aspect of corporate governance in the 1990s. A radical paradigm shift occurred at that time. Executive pay, which had until that time been treated as a corporate governance problem associated with breach of fiduciary duty (Yablon 1999, 279–80), was famously re-interpreted by Jensen and Murphy as an issue of misalignment between managerial and shareholder interests (Jensen and Murphy 1990). This transformation envisaged pay for performance as a self-executing mechanism, which could achieve alignment of incentives. Executive remuneration had, in effect, evolved from corporate governance problem to solution. The primary focus under this paradigm shift became the design and structure of optimal remuneration contracts (Bebchuk et al 2002; Core et al 2003). Other issues, such as the pay-setting environment, managerial power and compensation levels were rendered either minor themes or invisible (Hill and Yablon 2002). The transformation also served to legitimise executive pay, by adopting a “just deserts” approach to remuneration, offering the prospect of reward for superior performance and penalties for inferior performance (Jensen and Murphy 1990; cf Frydman and Saks 2008, 2, 33). Since the heyday of performance-based pay in the 1990s, there have been two major shocks to financial markets. The first involved the collapse...
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