More Pieces of the CEO Compensation Puzzle

No current issue in corporate governance is more hotly debated than the question, Why are American CEOs paid such high salaries? A recent and influential answer, dubbed the managerial power approach, has an appealing simplicity: CEOs so thoroughly control their firms\u27 compensation-setting machinery that they simply pay themselves whatever they want, restrained only by the tenuous limits of their own avarice and the vague need to avoid public outrage. As an explanation for a complex process, however, the simplistic managerial power approach is so flawed as to be nearly useless. The single most intriguing feature of CEO compensation for example, is its meteoric rise during the 1990s, the very period when CEO control over boards was declining and public outrage was increasing, yet the managerial power approach has no convincing explanation for the anomaly. This article argues that the managerial power approach\u27s failure is rooted in several theoretical problems, including (1) its tacit assumption that we can tell how much CEOs ought to be paid; (2) its reliance on a model of arm\u27s-length bargaining, instead of the relational bargaining model that modern contract theory suggests is usual in employment relationships, (3) its failure to distinguish between the bargaining power of the CEO and the CEO\u27s control of the bargaining process, and (4) its failure to examine CEO compensation in the context of the drastic rise in compensation of those at the tops of many other fields, including baseball players. The article argues that a full explanation of the compensation process will necessarily have to take these factors into account. The managerial power approach is simple and it fits nicely with common ideas about the greed of corporate executives, but it is not a useful description of the CEO compensation process

The Pernicious Effect of Employment Relationships on the Law of Contracts

The relationship between employment and contract law is peculiar. On the one hand, employment in modern American society seems to be a classic voluntary agreement among consenting adults. It is a promise or a set of promises, in the wooden but circular language of the Restatement, for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. Thus, employment relationships figure prominently in a great many landmark contract law decisions, in areas like capacity, duress, certainty, consideration, promissory estoppel, illegality and public policy, anticipatory repudiation, mitigation of damages, and specific performance. On the other hand, many of these same cases fit uneasily into the larger theoretical framework of contract law. They are important, not as the decisions that created the broad principles of contract law, but often for the opposite reason: they limit the application of contract rules in employment contexts, create variant forms of the established rules, or act as cautionary tales about the ability of abstract doctrine to yield unjust results. Often, contract law seems to be applied differently in employment cases than in cases involving commercial transactions. My thesis is that this uneasy relationship exists because employment is not really a contractual relationship at all; it is, and always has been, one of status. I am not arguing that it should be a status relationship, merely that it has been one since time immemorial and continues to be treated so today, regardless of the legal theories applied. In many respects, employment is more analogous to a family relationship than it is to a contract between a widget manufacturer and a retail distributor. It is not a simple commercial transaction, but instead, as explained by Rachel Arnow-Richman, it is a fundamental, life-ordering institution[ ]. As such, it is regulated by law in a host of ways entirely unrelated to the agreement of the parties, dependent solely upon the relative status of parties as employer and employee. As a result, contract law frequently does a poor job of dealing with employment law issues. The decision in Alaska Packers\u27 Ass\u27n v. Domenico, for example, is a kind of poster child for the problems that arise when we try to analyze employment issues under the framework of classical contract theory. As Debora Threedy has shown, Alaska Packers is all about workers using concerted economic power to gain wage increases from a consortium of employers. The real question is whether workers who have agreed to a given wage can legitimately strike for a higher wage, although this issue plays little or no role in the decision. Rather, the court treats the case as one involving the arcane contract doctrine of consideration, specifically one small part of the doctrine known as the pre-existing duty rule. If Alaska Packers arose today, it would be seen as a labor dispute. The issue would be whether the striking workers who signed the contract are violating their obligations under the labor laws. Specifically, are they engaging in appropriate collective action using appropriate economic weapons? We would view it as a problem of collective bargaining and apply the body of law that, over the past hundred years, has come to be called labor law. It is highly unlikely that doctrines like offer and acceptance, bargained-for exchange, and pre-existing duty would play any role in our analysis. This disconnect between contract theory and the reality of employment cuts both ways. While contract law frequently does a poor job of handling employment issues, as discussed below, the fact is that trying to force employment issues into a contracts framework has unfortunate effects on contract doctrine. The valuable role of contract law in structuring wealth-maximizing commercial relations are destabilized and made less effective by doctrines developed to protect employees and solve perceived social problems in the workplace. As noted below, attempts to deal with the issues that arise from this particular institution with tools designed for commercial transactions are unlikely to be successful. We are trying, as it were, to fill a round hole with a square peg. It is true that in any particular case we can get the peg to go in if we get a big enough hammer and pound long enough. But, it is unlikely that it will ever do a good job of filling that particular hole. More important, for my present purposes, this does not do the square peg much good, either, because it gets so dented and deformed in the process that it no longer fits well even into its original square hole. Using contract law to solve problems in a status relationship like employment has been as harmful to contract law as it has been to employment law. To make this point, Part II of this article begins with a brief discussion of both contract and employment law, specifically focusing on their origins, their relationship to each other, and the role of status in each. Part III examines three areas of contract law-consideration, capacity, and promissory estoppel-focusing on the influence that employment issues have had on contract law. Part IV concludes with a brief investigation of how courts continue to grab the tools of contract in an unsuccessful attempt to deal with the problems in a status relationship

Relational Contracting in a Digital Age

If, as it has sometimes been argued, changes in contract rules and theory are strongly affected by changes in economic conditions, we should note that the world has changed a good deal since the early 1960s when relational contract theory began to bloom. The economic world of 2004 is very different from the world of 1964. Modern relational contract theory was born about the same time as its great theoretical competitor, the rational choice approach of the legal economists. It came before the vast changes wrought by the information revolution and the increased globalization of the economy. What has relational theory taught us over the past forty years? How has it changed and adapted in light of those great economic changes? Where is it going in the future? Those were the general topics at a panel discussion which took place June 8, 2004, at the Oxstalls campus of the University of Gloucestershire in Gloucester, England. It was part of a conference entitled, The Common Law of Contracts as a World Force in Two Ages of Revolution, which marked the 150th anniversary of one of the most famous contracts cases of all time, Hadley v. Baxendale, and is the theme of the present Symposium. The Conference\u27s object was to explore how the common law adapts to and influences the kind of revolutionary changes that have swept over our society in the past forty years, and which swept over England in the forty years before Hadley v. Baxendale

Introduction, The Shaft: The Hadley v. Baxendale Song

Professor Snyder composes The Shaft: The Hadley v. Baxendale Son

The Pernicious Effect of Employment Relationships on the Law of Contracts

Using contract law to solve problems in a status relationship like employment has been as harmful to contract law as it has been to employment law. To make this point, Part II of this article begins with a brief discussion of both contract and employment law, specifically focusing on their origins, their relationship to each other, and the role of status in each. Part III examines three areas of contract law-consideration, capacity, and promissory estoppel-focusing on the influence that employment issues have had on contract law. Part IV concludes with a brief investigation of how courts continue to grab the tools of contract in an unsuccessful attempt to deal with the problems in a status relationship

Clouds of Mystery: Dispelling the Realist Rhetoric of the Uniform Commercial Code

Students in contracts and commercial law courses are routinely taught that Article 2 of the Uniform Commercial Code is a product of the Legal Realist movement-that it was designed by its principal draftsman, Karl Llewellyn, to more accurately reflect the needs and realities of modern business than the prior common law and statutes it displaced That story is important, because it is routinely retold as we explain to students the provisions in Article 2 that change the powers, rights, and responsibilities of contracting parties. Yet that story is a myth. There is relatively little Realism\u27 in Article 2, whether we are speaking descriptively or normatively. Moreover, the rhetoric of Realism actually serves to camouflage the deliberate regulatory and social policy decisions that were made by the drafters and the legislators. This Article, part of a symposium on Commercial Calamities focuses on four of the major innovations in contract doctrine introduced by Article 2: the new contract formation rules, the merchant duty of good faith, the relaxation of the certainty requirement, and the greater reliance on trade usage evidence. Upon examination, it turns out that none has any discernable Realist roots. None of them reflects either the needs or desires of actual merchants and the lawyers who represent them. Rather, they are the result of a deliberate but largely unexpressed desire to move away from libertarian ideas of laissez-faire contracting to a regulated communal system purged of hard bargaining and sharp deals. More regulation of contracting in the interest of restraining hard bargaining may be a laudable goal, but it has nothing to do with Legal Realism. This Article argues that the calamitous result of this Realist rhetoric is to shift the focus away from the actual policy choices made in the statute to a world of mythical bargains in fact where we can pretend that we are simply carrying out the wishes of the parties. Stripping away the rhetoric is the first step in allowing us to take a clean look at what the drafters wrought and to make our own social and political decisions

Employer Withdrawal from Multiemployer Bargaining--Charles D. Bonanno Linen Service v. NLRB

Large numbers of employers in this country, particularly small businesses, are members of multiemployer bargaining units. Historically, employers and unions have been able to withdraw from those units when the bargaining process has reached a stalemate. A recent decision of the United States Supreme Court, however, has made it more difficult for employers to withdraw from multiemployer units even in the face of a prolonged bargaining impasse. The decision, which settles a long-standing dispute between the National Labor Relations Board (Board) and several circuit courts of appeals, is a boon to labor unions, for it prohibits employer withdrawal in the face of union whipsawing. The decision does little to clarify the Board\u27s role as an arbiter of economic weapons, but it may signal increased deference by the Court to the Board\u27s perceived expertise in balancing the interests of employers and employees