Corporate Governance Going Astray: Executive Remuneration Built to Fail

FESTSCHRIFT FOR PROFESSOR KLAUS HOPT, pp. 1521-1535, Walter de Gruyter, 2010

Duisenberg School of Finance Policy Paper No. 5

33 Pages Posted: 7 Jun 2011

See all articles by Jaap W. Winter

Jaap W. Winter

Vrije Universiteit Amsterdam; University of Amsterdam; Insead

Multiple version iconThere are 2 versions of this paper

Date Written: March 22, 2011

Abstract

Modern remuneration systems for executive directors include substantial elements of performance based pay. The idea behind this is that by rewarding executives for performance their interests become aligned with those of the company’s shareholders, thus bridging the principal-agent gap. Executive remuneration through performance based pay has become an explicit corporate governance tool that is supposed to improve the governance of companies. Others have argued that the governance and design of performance based pay system is often poor, as result of which the principal-agent problem actually increases. This paper argues that even if we can improve the governance and design of executive performance based pay, it cannot be made to work because people behave differently than performance based pay assumes. Research revealing our bounded rationality, bounded awareness and bounded ethicality shows that we simply cannot handle executive performance based pay. Regulation will not solve the problem, what is needed is a paradigm change, a refocusing of attention by shareholders, non-executive and executive directors. Such a paradigm change requires a deconstruction of the current myths surrounding performance based pay and the creation of new remuneration narratives.

Keywords: executive remuneration, corporate governance, variable pay, performance based pay, alignment

Suggested Citation

Winter, Jaap W., Corporate Governance Going Astray: Executive Remuneration Built to Fail (March 22, 2011). FESTSCHRIFT FOR PROFESSOR KLAUS HOPT, pp. 1521-1535, Walter de Gruyter, 2010. Available at SSRN: https://ssrn.com/abstract=1792483

Jaap W. Winter (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam
Netherlands
+31653978419 (Phone)

University of Amsterdam ( email )

Oude Manhuispoort
Amsterdam
Netherlands

Insead ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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