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An Unusual Executive Compensation Plan

By:
 Robert Clark   (Published: June 25, 2013)
Product number:
HLS 13-18
Length:
18 pages
English:
PDF
Product Type:
Role-Play Case Study
Link to Free Educator Copy:

Abstract

In this role-play case study, participants put themselves in the shoes of a law firm attorney who has been tasked with advising a board of a company about a proposed compensation arrangement with its proposed new CEO. While the chair of the board’s HR committee believes this potential CEO would be an excellent fit with the company, the candidate is requesting a compensation package that is over twice the amount the previous CEO received. In addition, the proposed package has structural features that depart greatly from normal executive compensation plans.  This exercise forces participants to consider every aspect of the proposed compensation package, and asks them to assess, and advise the board about minimizing, a variety of risks:  the potential personal liabilities board members may face if a court were to find the package excessive or wasteful; the potential non-deductibility for corporate tax purposes of certain elements of the unusual compensation plan; the arguable lack of a sufficient link between the plan and long-term performance goals; and the impact of the plan’s features on the opinions of proxy advisory firms and on the directors’ chances of re-election.  Finally, participants are asked to asked to identify the best corporate governance practices of boards called upon to consider such compensation plans, and to consider how the board in this case might try to follow them.

Included in this case study are excerpts from the 2006 Delaware decision In re The Walt Disney Co. Derivative Litigation, (906 A.2d 27 (Del. 2006)) in which shareholders of The Walt Disney Company brought a derivative action against the board, alleging that the directors were grossly negligent in their approval of CEO Michael Eisner’s compensation package. Participants are able to compare and contrast this decision with the fictional situation of the role-play, gaining a deeper understanding of the factors at play in determining best board practices in executive compensation decisions.

This case study is part of a series that also includes HLS 13-19 Can a Management Team and a Board Just say No? and HLS 13-20 Risk Management Duties and Liabilities at the Top.

Learning Objectives

Discussions of this case study covers many important aspects of corporate law, such as due care, good faith, and waste claims. It also presses participants to think beyond likely litigation outcomes and to assess the collateral consequences of controversial departures from good governance. As participants put themselves in the shoes of an advising attorney, they must balance the desire of the company to have an effective CEO while shielding the board members from potential lawsuits and bad reactions from investors.

Subjects Covered

Executive Compensation, Shareholder Lawsuits, Corporate Governance

Setting

Geographic: United States

Industry: For-Profit Online Education

Event Year Begin: 2013


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