Management remuneration plans and performance

\(\mathrm{XYZ}\) is a global financial institution with an executive remuneration scheme that includes both cash-based and share-based remuneration and a mix of shorter term and longer term awards. At least \(80 \%\) of the performance-based award is deferred. At least \(50 \%\) of the total performance award (or bonus) is awarded through a share ownership plan, in which the executive receives XYZ shares that vest in three instalments over 3 to 5 years. The senior executives do not become legally entitled to the shares until they vest. In addition, \(30 \%\) of the total performance award is awarded under a deferred contingent capital plan. This award does not vest for 5 years and is conditional upon further performance targets being satisfied. The award is reduced if XYZ makes a loss during the 5 years until it vests.

Required 

1. Explain how the use of a bonus plan linked to performance and the deferral of part of the bonus can reduce the agency problems of the owner-manager relationship.

2. How does the senior executive equity ownership plan reduce agency problems beyond that which is achieved by the bonus plan?