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.
And another interesting paper from John Hendry (who has done some great stuff previously on investor and executive conceptions of shareholders as 'owners')
Informed by agency theory, the dominant theory and practice of CEO pay both exclude non-monetary incentives and treat money itself as pure exchange value. Drawing on the economics of non-monetary incentives and the sociology of money, we use qualitative evidence from UK FTSE100 CEOs, to challenge and supplement this perspective. We conclude that for these CEOs even incentive pay acts more as security than as incentive and that the monetary (exchange) value of pay matter less than its symbolic values and significantly less than peer group recognition and respect, personal achievement, job satisfaction, and the challenge of beating corporate competitors.