Fully competitive pay can be completely unreasonable, under the wrong circumstances. Here is an example of how compensation can be evidence to change corporate status when the pay methods are improperly applied.
Called to D.C. by attorneys in the imposing headquarters of the U.S. Department of Energy decades ago, I heard a fascinating tale with an even more interesting ending.
During the OPEC oil embargo of 1973, U.S. price controls exacerbated the energy crisis. Limits were placed on the price of already-discovered "old oil" while newly discovered oil could be sold at a higher price to encourage investment. One oil broker took special advantage of the opportunity to profit from this exciting government-controlled environment of high demand amid short supply.
This aggressive entrepreneur set up an oil brokerage corporation in his basement. He bought and sold tankers of oil on the open seas via telephone for eventual sale to American refineries. Perfectly straightforward -- except for the particularly lucrative technique he adopted to maximize his profit margin. He forged the oil provenance paperwork to re-label old oil as new oil which commanded a higher price. His corporation ended up making many billions of dollars during the peak oil shortage years. Quite a substantial sum, justifying rather impressive executive compensation for this CEO and his family corporate officers.
The story continues with a twist, explaining why I was contacted by the Department of Energy rather than the Department of Justice. Federal criminal charges were filed when his fraud was uncovered. Rather than lose his freedom (and ill-gotten money), the accused subject suborned the DOJ prosecutor. The feds, now having some experience with this slippery guy, quickly discovered the bribe and promptly convicted him of suborning the prosecuting attorney; so he landed in prison for the bribery, rather than for the original oil fraud. The bribee also went to jail. With DOJ thus embarrassed, DOE took over and proceeded to sue our enterprising oil broker to recover damages.
The public damages at stake in the federal trial were substantial. By the time the scams were uncovered and the perpetrator criminally charged by the U.S. Department of Justice, his massive commercial fraud had added 5 cents to the average cost of a gallon of gasoline in America. An impressive achievement, indeed! Of course, the jailed brokerage founder/CEO smirked that his regular corporation was now bankrupt, without assets, while he had no personal liability.
DOE needed expert compensation testimony to penetrate the corporate shield that protects officers from personal liability. Long story short, the CEO's pay (stashed in offshore accounts) was not contested. The compensation of his son, the next highest paid employee, was a different matter.
The pay of the corporate officer serving as Legal Counsel and fellow board director of the multi-billion dollar international oil brokerage was perfectly proper in amount; within one standard deviation of the norm, as I recall. Nevertheless, it provided sufficient proof to pierce the corporate veil and expose the CEO (controlling stockholder) to personal liability for billions of dollars of damages to the American public. Turns out that although the ~$500K salary was OK for a top attorney at industry peers of its size, sonny boy was still in law school. The corporate legal counsel had not even graduated or passed the bar!
Such flagrant flaunting of corporate protocols for executive pay decisions demonstrated that the business's "corporate status" was a legal fiction. The judge quickly ruled that the thief who treated his wholly controlled firm as a sole proprietorship and personal piggy bank was actually running a sham corporation and thus ineligible for the corporate legal protections against personal liability.
The feds were awarded quite a few billion, but they collected almost nothing. Foreign banks were not cooperative in that era.
Compensation lesson: context is vital!
What other "war stories" interest you?
E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience. After corporate HR jobs in manufacturing and consulting in every throughout North America, he served as Senior Associate of pay survey software publisher ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook) and speaker, Jim gave expert witness testimony in many reasonable executive compensation cases and also serves on the Advisory Board of the Compensation and Benefits Review.
Image courtesy of cbenjasuwan at FreeDigitalPhotos.net