Some Sense on Top Pay

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3 Responses

  1. Anonymous Coward says:

    This Article explains why and how traditional contract law’s theory of unconscionability should be used to create a modicum of judicial scrutiny to strike obnoxious pay contracts and preserve legitimate ones. Under this proposal, pay contracts that are the product of managerial domination of the process and formed on terms massively favoring the executive will be stricken.

    It sounds like you want to make pay the executive who is being excessively compensated rather than the other executives who agreed to the excessive compensation. I don’t know if I agree with that.

    It seems to me that if anything, you have to put the executives on the board who approved the excessive compensation on the hook for paying the company back anything over and above what would be unconscionable. That better protects the new hire executive’s reliance interest in being compensated as agreed, and it puts the duty not to approve excessive compensation on the parties who have a fiduciary duty to the company rather than the not-yet-executive who doesn’t. The alternative would seem not to deter excessive compensation very much at all, because the executive merely loses the pay he wasn’t entitled to in the first instance and then only after litigation. Whereas the executives approving the excessive compensation would have everything to lose personally by approving excessive compensation if they were the ones who had to compensate the company for the excess.

    Incidentally, it seems like there really isn’t any way for the shareholders to win here. If you initiate these kinds of lawsuits then you create personal divisions between board members at the company and consume the time of directors and executives who might otherwise be spending that time running the company. That seems likely to harm the company more than any recovery of excessive compensation could help it.

  2. Lawrence Cunningham says:

    The suggestion in comment 1 is radical and would require substantial changes in existing law. The proposal the article makes is modest, explaining how existing law can be applied. Existing law authorizes rescission of unconscionable contracts. It does not impose penalties on those who foolishly make them or protect the reliance interest of those who would reap windfalls. The comment makes valid points about a legal world that could possibly exist, but it is not the world that does exist and, on this subject, proposals to change the world to match ideal theoretical visions have failed. On the “incidental” point, shareholders of companies whose boards form contracts that would attract scrutiny under this proposal would benefit from boards not “spending time running the company.”

  3. Anonymous Coward says:

    It does not impose penalties on those who foolishly make them or protect the reliance interest of those who would reap windfalls.

    I take it you have no sympathy for the executive who is wooed to a new company by an “unconscionably” large compensation package which is not much larger than the e.g. stock options the executive would have to give up at his previous company. Or the prospect that the alternative could cause executive pay to go up because executives demand higher compensation to account for the risk that their compensation is declared unconscionable and rescinded.

    The comment makes valid points about a legal world that could possibly exist, but it is not the world that does exist and, on this subject, proposals to change the world to match ideal theoretical visions have failed.

    That sounds enough like “the status quo must not be questioned” to make someone feel uncomfortable.

    On the “incidental” point, shareholders of companies whose boards form contracts that would attract scrutiny under this proposal would benefit from boards not “spending time running the company.”

    Three points here: First, an executive who negotiated such high compensation is far more likely to be competent than the board who approved it, and it is the executive’s time that is most likely to be wasted. Second, the board may or may not be optimal, but having a bad driver is far better than having a distracted bad driver. Lastly, the idea that only those deserving of it will attract scrutiny ignores the substantial harassment value that such suits would have to hecklers and agents of competitors.