Executive Compensation Update: Guaranteed Bonuses and the Compensation Czar

(Again, mini-posts this morning in light of time constraints - thanks!).

Compensation Czar Feinberg's August 13th deadline for submission of compensation proposals is fast closing. Subject to the deadline are seven firms that received federal funds earlier this year, including Citigroup. In light of this deadline, I found it really interesting that guaranteed bonuses - uncommon during the worst of the economic crisis - have made a noticeable comeback.

Feinberg's 8/13 deadline is not the only government impetus to try and chain down executive compensation ... but a cynic might say both sides - firms vs. public outrage (proxy government) - of this argument are operating blind to the other's actions. So who is in real need of the reality check? FWIW.

How likely is recouping executive compensation, really?

Okay - so Americans used to carte-blanche corporate executives making a lot of money; bankers making a lot of money; and that errant as-seen-on-tv-product-guy making a lot of money. Before the current economic snap, no one really cared; or, at least, they didn’t care enough to litigate over it. Along comes Fall 2008, and since, each public disclosure of a corporate pay package inevitably throws the media cycle into full whirl, encouraging shareholders and creditors to litigate to recoup executive compensation paid, including bonuses. Because it’s really just that simple, right? No, it so is not.

Allen and I wrote a paper that acts as a solid foundation primer for counsel on both sides of this issue, Litigation and Recoupment of Executive Compensation (forthcoming). I wrote several sections, one which discussed New York State case law on the matter. There are a number of different legal avenues moving parties could take, and I will discuss a few here. As a threshold matter, understand plaintiffs have their work cut out for them.

Grasso
Everyone in Manhattan knows about Richard Grasso. He was the former Chairman and CEO of the NYSE when it was organized as a not-for-profit entity. At the time of his departure in 2003, he had been party to a compensation agreement paying him $ 184 million over the course of five years (Grasso’s bonus in 2002 was $ 10.6 million). Then Attorney General Eliot Spitzer brought six claims against Grasso in an attempt to recoup the compensation. The claims ultimately failed; several as a result of loss standing on the Attorney General’s part (mid-litigation, the NYSE transformed into a for-profit corporation). The remaining claims failed because they did not satisfy the mental element of bad faith or knowledge, per New York’s Not-For-Profit Law. This bad faith or knowledge element mirrors the protection for-profit corporate actors enjoy at common law under the business judgment rule.


Corporate Waste
Basically, no matter how large or seemingly unreasonable the compensation awarded may be, if there is some relationship to the job performed – responsibilities and complexity of obligations, industry standards, expertise and experience – precedent suggests a New York court will not disturb a properly-determined compensation award absent bad faith or fraud. (n. 1). Precedent that does recoup executive compensation under a claim of corporate waste is quite old and involves smaller executive compensation packages than is the 2009 norm. As corporate counsel remarked to me recently, “When you’re talking hundreds of millions of dollars in cash flow each year, what is a $ 20 million compensation reward?”

Attorney General Andrew Cuomo’s Campaign for Governor of New York
Just a joke, Mr. Attorney General … At different points since the Fall of 2008, the Attorney General’s office has effectively leveraged The Martin Act and Fraudulent Conveyance claims to resolve very-public issues of executive compensation.

The Martin Act is one of New York’s blue sky provisions, giving the Attorney General broad powers to investigate and litigate matters of fraud where the sale of securities is involved. Attorney General Cuomo successfully relied on The Martin Act earlier this year to compel former Merrill Lynch CEO John Thain to divulge who received the Merrill bonuses prior to the Bank of America merger.

Fraudulent conveyance in New York is codified by statute, and allows creditors to recoup from transferees and beneficiaries any amounts transferred. Attorney General Cuomo has twice successfully leveraged the threat of fraudulent conveyance against American International Group. First in the fall of 2008, Cuomo secured AIG’s agreement to freeze salaries and bonuses. Then again in early 2009, Cuomo subpoenaed the names of the AIG employees receiving bonuses in light of further government subsidy. The move resulted in fifteen of the twenty highest bonus recipients voluntarily forfeiting their award. To what degree these results were achieved by the strength of the fraudulent conveyance claim, or by the heft of the Attorney General, is left for other legal observers to say.

The topic of executive compensation is interesting, and will certainly be discussed ad nauseam moving forward in the next several years. I will periodically revisit pieces of the research document Allen and I put together, but will also develop side inquiries in greater depth as this blawg moves through the summer.

And so good luck, you-activist-angry-plaintiffs-You … you’re going to need it.

n. 1: See e.g. Heller v. Boylan, 29N.Y.S.2d 653 (Sup. Ct. 1941). View full post and comment string ...

Non-disparagement Agreements

From go, let me state: this post does not address the provision as used in settlements, in the context of product disparagement, or as a term in an employment separation agreement. Rather, as between an employer and employee in the course of employment. Have you guys seen this? I reasonably imagined the provision existed, as a concept or theory, but only recently had a friend be subject to one. The non-disparagement agreement was presented in tandem with a confidentiality agreement, but was distinctly separate and was a one-way street (he could not disparage the employer, but no language protected him from the employer’s disparagement). His encounter startled both of us a little. While acknowledging a company’s interest in controlling its appearance, we wondered what an employee could possibly say that is not already actionable under defamation? And is truth a defense in light of a non-disparagement agreement? Too, if the employee is at-will, why the need for the agreement at all; simply dismiss them (or threaten to) and offer a negative reference. Further, how does the element of leverage factor into the enforceability of a non-disparagement agreement?

In New York, non-disparagement clauses or agreements are intended to protect the employer from misrepresentations about themselves, their product and services, or from unfair competition. C.f. To successfully plead breach of a non-disparagement clause or agreement, an employer must show it sustained damages as a result of the employee's statements. There is some case law addressing non-disparagement clauses as a term of separation agreements, where disparaging statements were made post-separation. It appears concurrent claims of defamation are made to the claim for breach of agreement, and traditional defenses apply. But a review of New York case law does not reveal discussion of agreements concurrent to employment. Employment law is not my practice interest, but I imagine a court would liken the enforceability of such a provision to the same reasonableness standard other restrictive covenants are subject to. For instance, the provision might be enforceable if the employee is: of such import to be sought after by competitors; has been generously compensated in relation to his peers and in the context of his industry; and is exposed to information that is a type of trade secret, or has otherwise been so integral to the employer's work that the employee necessarily has knowledge or know-how that would carry clients or next generation product away from the employer. Too, I imagine the agreement must be reasonable in terms of: the context it was agreed to; the type of, and examples of, such comments that are considered "disparaging" - to whom, about what specifically, in what detail; as well as the length of time the covenant applies (only during the course of employment? or is it presumed the provision applies upon separation as well?).

FWIW: my friend hasn’t told our circle about the agreement, and I have been “politely requested” not to mention his employer here. Whether it was a result of his signing the agreement or his sense of taste and professionalism, I guess, is subject to the perspective of the commenter.

( Photo courtesy of Rosenblumtv).