This chapter will consider:

• the problem of managerial performance and the balance of reward between the parties to the governance arrangement;

• the policy origins of recent problems;

• trends in bonus and option implementation;

• the fundamental flaws in the bases of remuneration structures;

• the pernicious effects of management share options and the operation of ‘moral hazard’ in respect of options;

• different approaches to the problem.

Introduction

More than any other issue, the problem of apportioning reward to managers and shareholders has typified the breakdown of effectiveness of the traditionalist view of corporate governance. It is the issue which generates most heat and least light over how corporate governance should work – but it also indicates how the policy levers that are pulled are, in reality, disconnected to the governance structure. The problems brought about by the use of inadequate and improper bonus systems therefore affect the behavioural and structural aspects of governance and, through failings in the individual exercise of these they go on to affect, the systemic aspects of governance. The prevalence and inflammatory significance of the popular shorthand phrase – ‘the bonus culture’ – signifies the way in which the issue has achieved notoriety in the minds of those who would not ordinarily be interested in such matters.

The debate is not limited to the UK: American shareholders have complained about levels of pay and rewards for many years. The issue of executive pay entered politics in France in February 2012 when the presidential candidate of the French Socialist party, François Hollande, said he would impose a 75 per cent marginal tax on annual incomes above €1 million, if elected.