Legal Commentary

The other equally false argument raised is that bonuses must be paid out because A.I.G. has existing executive contracts - which, frankly, as a condition of receiving U.S. bailout dollars for A.I.G. can be nulled by the government without batting an eye, if they were smart enough and willing to do so, which is apparently not the case. Moreover, nothing prohibits the U.S.A. in this or other cases from legally voiding all exorbitant executive compensation schemes - all across the nation - as unconscionable contracts within the context of the vandalizing of corporate resources.

How much is a man worth? And what is a "conscionable contract" of compensation when measured against the median earnings in the United States?

In September, 2008, LawPundit posted the US Census Bureau Job Earnings Statistics for the year 2007 showing the median annual earnings in the United States for all jobs, occupations and professions, including the legal and health professions, which rank at the top of a very long list, of which we show only the top ones here:

"The median income data for the legal occupations (p. 34 of the report):

Lawyers - $120,400 (males), $93,600 (females)
Judges, magistrates, and other judicial workers - $108,100 (males), $69,500 (females)
Paralegals and legal assistants - $45,700 (males), $42,600 (females)
Miscellaneous legal support workers - $56,000 (males), $40,700 (females)

Health occupations are second to legal professions, with a median income of ca. $100,000 annually, although male physicians and surgeons have higher median earnings of ca. $180,000 annually, followed by male dentists with $150,000 per annum....

Physicians and surgeons - $181,200
Dentists - $150,500
Lawyers - $120,400
Chief executives (CEOs) - $116,800"

So why does the situation exist in America (and elsewhere) that CEO's at the country's largest corporations are as overpaid as they are? The Wikipedia writes at Executive Compensation:

"Over the past three decades, executive compensation has risen dramatically beyond the rising levels of an average worker's wage....

Forbes magazine counted the [Fortune 500] CEOs compensation to $3.3 billion during 2003 (which makes $6.6 million a piece). Notice that this figure includes gains from stock call options used; the options may have been rewarded many years before the option to buy is used.

In Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, Harvard Business School professor Rakesh Khurana documents the problem of excessive CEO compensation, showing that the return on investment from these pay packages is very poor compared to other outlays of corporate resources....

The U.S. stood first in the world in 2005 with a ratio of 39:1 CEO's compensation to pay of manufacturing production workers. Britain second with 31.8:1; Italy third with 25.9:1, New Zealand fourth with 24.9:1."

There is no rational reason for the top person in a company to be permitted by society to earn 40 times more than an average production worker. The reason for this great difference is GREED at the top levels of society, and foolish sanction of that greed by the legal system.

In the United States executive salaries have been spiraling upward since 1970, the beginning of the oil-cartel induced price-push inflation spiral. Indeed, Gabaix and Landler discovered that from 1980 to 2003 market capitalization of companies in the U.S. had increased six-fold and that executive compensation had kept pace with that, as opposed to normal salaries which only kept pace with the actual economic growth of ca. 2.5 % a year.

What that means is that the energy-price controlled and highly inflationary variable market capitalization and executive compensation at large corporations functions as an indirect long-term Ponzi scheme which siphons off the assets of companies and works short-term to the often vast personal wealth advantage of those who sit at the corporate controls. Since actual economic growth is far below increases in market capitalization and executive compensation, that compensation can not - by definition - derive out of any actual economic value created, but rather can - where else - only be financed by the gradual depletion of the real assets of institutions - into executive pockets. The famously failed Enron is a good example for this where "executives were paid in accordance with the estimated value of a deal at the time the deal was done, and consequently faced no incentive to make a profitable deal."

Indeed, just as in the case of the ever-spiraling salaries of college football coaches, once a given level of compensation is reached at any institution, successors often tend to receive equal or more pay, regardless of qualifications or results. Once you are on the CEO payroll of society, you are on easy street, because "the job" has a price tag, regardless of whether that price tag is economically sound or not. CEOs are thus shuffled around like sports head coaches, all the while sucking the economy dry by their presence on the executive gravy train.

Since the money being paid to executives is usually not the money of any particular private person, but belongs to incorporated legal entities, the normal monetary checks and balances which exist in the private sphere simply are not present. The people in charge of the purse strings feel no normal limitations because it is not "their" money that is being paid out. In the course of time, this bankrupts numerous institutions, because vast amounts of wealth gradually move from institutional coffers into the bank accounts of their executives and directors - all perfectly legal, if this transfer is not viewed to be the result of unconscionable contracts.

Greatly at fault for this situation is of course a legal system which permits company leadership to earn unconscionable amounts and allows greed to run rampant in corporate and legal America.

There is in law no reason whatsover not to impose on the economic system the same kind of compensation standards that rule professional sports in imposing salary caps (called wage caps in the UK). The reason for salary caps is outlined at the Wikipedia as follows:

"In professional sports, a salary cap (often called a wage cap in the United Kingdom) is a limit on the amount of money a team can spend on player salaries, either as a per-player limit or a total limit for the team's roster (or both). Several sports leagues have implemented salary caps, both as a method of keeping overall costs down, and to ensure parity between teams so a wealthy team cannot entrench dominance by signing many more top players than other teams....

Players and players' unions generally concede that the overall wealth and stability of a league is just as important as the chance at higher wages for certain star individuals, and support the application of salary caps in principle, as long as they are not set too low.

Many executive compensation packages are unconscionable on their face because they are a product of "insider" negotiation between executives and company board members who both run most institutions in a symbiotic - personally beneficial - relationship. The long-term health of a company is often secondary. Executive hiring is often neither neutral nor objective.

Executive compensation packages are in our opinion often unconscionable under contract law because an unconscionable contract is defined as one which is one-sided in favor of a person or persons who have superior bargaining power over other interested parties, for example, normal company stockholders. As written at shareholdersfightback.com:

"Directors in large corporations are paid well and are extended many perks by management. The level of emoluments extended to directors are more than adequate to massage and mold votes in favor of what the CEO?s want. Thus, the very notion of Director independence is questionable.

If Directors were truly "independent", many shareholder proposals would be submitted for a vote with a favorable recommendation from the Board but that is just not the case."

Full post as published by LawPundit on March 15, 2009 (boomark / email).