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Corporate Governance, Executive Compensation, Corporate Performance, and Worker Rights in Bankruptcy: Some Lessons from Game Theory

This Article proposes amending the Bankruptcy Code so that when a publicly held company files for bankruptcy, its senior executives must automatically disgorge all compensation beyond 330,000 dollars annually for the previous three years. An annual salary of 330,000 dollars still places these senior executives in the top one percent of wage earners. Disgorged moneys recovered would be applied to compensate employees for losses to their 401k pension plans. These 401k plans are typically filled with company stock. This proposal is designed to compensate workers when their corporate employer files for bankruptcy, causing the 401k plan to be worthless. Bankruptcy is an appropriate triggering event because firms in bankruptcy typically lay off a substantial number of their workers. By providing this safety net, workers are less likely to face the prospect of both loss of employment and loss of retirement savings. The role of the firm is the maximize shareholder value. Executive compensation is designed to reflect firm performance. During the last two decades, however, executive compensation has increased dramatically without necessarily bearing any relationship to the company's performance. If the firm is filing for bankruptcy, then firm performance never warranted the senior executives receiving excessive compensation. Applying the Prisoner's Dilemma, a game theory exercise, to executive compensation and firm performance suggests that this proposal better aligns shareholder interests with firm performance. A severe sanction persuades executives to place corporate performance above stock manipulation for short-term gain. Theoretical justification for this proposal also can be found in the bankruptcy principles of avoidance of preferential transfers and fraudulent conveyances. The author concludes that the political environment may be ripe for reform in the areas of executive pay and workers' rights.