Friday, August 28, 2009

Wells on The Fight over Executive Compensation in 1930s America

'No Man Can Be Worth $1,000,000 a Year:' The Fight Over Executive Compensation in 1930s America is a new paper by Harwell Wells, Temple University Beasley School of Law. Here's the abstract:

Challenges to executive compensation occupy today’s headlines, but as this Article shows fights over executive compensation have a long history. Executive compensation first took the national stage in the 1930s, when revelations of corporate chieftains’ million-dollar-a-year pay packages sparked outrage and campaigns to cap executive compensation through measures including new requirements for pay disclosure, litigation against boards of directors, punitive taxation, and direct government limits on pay. These campaigns forced lawmakers and courts to wrestle not only with angry voters and shareholders but also with fundamental questions: how, in an era when ownership and control had been separated, could the managers of the modern corporation be controlled? How much did executives, or anyone, deserve to be paid? And, who would decide? The fights revealed deep tensions between some legislators’ and courts’ desire to subject executive pay to a level of scrutiny and control not seen before or since, and their reluctance to become to entangled with the internal workings of corporations. The story told here is, in part, of the rise and fall of ambitious proposals to curb executive compensation and the success of more modest innovations. This Article, the first legal history of this overlooked episode, not only recounts the 1930s struggles but draws a contrast between the wide-ranging battles over compensation of seventy years ago and the today’s more narrow debates.
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1 comment:

Shag from Brookline said...

I recall a joke about a power company that crashed. Its engineers could not identify or fix the problem after days of around the clock efforts, resulting in the loss of huge revenues. Finally, the company hired a local plumber who walked around the power plant for awhile and then with his hammer struck a spot on the intricate plant machinery, which promptly started up and the company was back on line. The plumber sent a bill for $5 million. The company was startled by the amount and asked for an itemized bill. The plumber responded:

$1.00 cost of hammer
$4,999,999 knowing where to knock

I heard this some years back in my early practice on the matter of contingent fees.

Federal tax law permits for business deductions for reasonable compensation paid to employees, including executives. But what is reasonable? With the local plumber, the power got back on. But with many highly paid executives, they often don't get the power back on and still get paid the big bucks. The problem lies with Directors who may rely upon these highly paid executives to become and continue as Directors AND themselves be well compensated. Stockholders as owners are not effective in making their voices heard.