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Executive Compensation, Lehman Brothers, and the Delaware Courts: An Absence of Meaningful Standards and the Consequences

By J. Robert Brown

It seems that Lehman Chief Executive Richard Fuld Jr. and members of the House Committee on Oversight and Government Reform got into a dispute on Monday over the amount of compensation paid to Mr. Fuld since 2000.  As the WSJ noted:

• Meanwhile, lawmakers estimated that Mr. Fuld pocketed roughly $480 million in pay since 2000. He suggested that his pay was closer to $350 million in that time and noted that Lehman's compensation system ties executive pay to performance. He said his 2007 pay, most of which came in Lehman stock, was nearly wiped out because of Lehman's bankruptcy filing.

Whether Fuld received $480 million or the more modest sum of $350 million (either $60 million or $43.75 million a year over an eight year period), the amounts have to be viewed as extraordinary.  Needless to say, he no doubt worked hard for the money (he has been described as having a dogged work ethic) but surely the amounts exceed what was necessary to keep Fuld, a self professed Lehman Lifer, at the helm.  Had he earned $200 million over the same period, one suspects that he would have remained CEO of the investment banking firm.

So what explains the enormous amounts of compensation?  The law applicable to the determination of executive compensation.  Its not hard to guess where Lehman is incorporated.  Delaware, of course.   Moreover, it is predictable that the "independent" directors on the board that authorized the compensation were well paid.  How about $350,000 for eight meetings?

Congress took away from Delaware some of the control over compensation in the Bailout Bill, at least for companies participating in the bailout.  But the intrusion is limited in scope and temporal.  In the meantime, while the reforms will likely temper compensation in the short term, it is only a matter of time.  With the lack of standards under Delaware law, executive compensation will escalate, even in the financial services industry, once the financial turmoil settles down and public attention drifts elsewhere. 

Full post as published by The Race to the Bottom on October 09, 2008 (boomark / email).