ContractsProf Blog

Editor: Jeremy Telman
Valparaiso University Law School

Wednesday, April 1, 2009

"Pay for Performance" sponsor explains legal reasoning . . . sort of

Bbb The sponsor of the "Pay for Performance Act of 2009" gives his reasoning in a Huffington Post piece today.  Freshman Rep. Alan Grayson (left), who introduced the bill, is a Harvard Law grad who was a staff clerk at the D.C. Circuit and used to do government contracts work at the Fried, Frank ifirm n D.C., but his explanation for why his bill is reasonable contains some dubious legal reasoning.  His basic argument is that "the taxpayers are owners [of these covered institutions], and owners of companies set salaries for their employees."

Setting aside whether the bill is a good idea -- lots of folks are lining up on either side -- Grayson's legal analysis is wrong.  The "taxpayers" (to pick nits, it's the 'government," not the "taxpayers" that owns the stake) certainly have an ownership interest in those entities where the government has taken a capital stake.

But it's not true that "owners" of public companies "set salaries for their employees."  It is the directors of a company who are responsible for making decisions on employment and compensation -- the owners' only remedy is to fire the directors.  That's not a nit-picky distinction.  There's a solid line of cases going back to McQuade v. Stoneham (1934) which hold that any attempt by shareholders to bind directors to whom they can employ and at what compensation is void.  Directors are free to ignore commands from their majority shareholders, and are, in fact, required to do so if they believe that the action isn't in the firm's best interest.

None of this is to say that the government can't do this -- that's one for the Con Law folks, probably -- but it is curious that a highly trainsed lawyer has offered a pretty dubious legal analysis in support of it.

[Frank Snyder]

[NOTE:  Edited to remove erroneous description of the scope of the act.  F.S.]

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