Excessive executive compensation is endemic to U.S. corporations, and the trend is spiraling out of control. To challenge excessive pay packages, shareholders sometimes institute derivative suits. This approach has had limited success, however, because several principles of law – most notably the business judgment rule – shield directors from liability for awarding exorbitant pay to high-level managers. The business judgment rule removes the unreasonableness of compensation packages from the reach of judicial review. This Article proposes that corporations duly approve procedures to arbitrate shareholder challenges to excessive compensation agreements. Arbitration is uniquely suited for this purpose. Arbitrators are not bound by procedural and substantive law. They could therefore decide the reasonableness of executive compensation packages without the constraints of the business judgment rule and other legal impediments. Objections that the business judgment rule should not apply to compensation cases are unpersuasive because the justifications for the business judgment rule – (1) to prevent judges from meddling in the formulation of corporate policy and strategy and (2) to encourage reasonable corporate risk-taking – do not apply to executive compensation cases. Corporations would select private arbitrators, who, unlike judges, would be chosen for their expertise and experience in executive compensation cases.
- Executive compensation,
- dispute resolution,
- corporate law
Available at: http://works.bepress.com/kenneth_davis/10/