Opinion ID: 1829183
Heading Depth: 1
Heading Rank: 1

Heading: Compensation to Officers.

Text: It appears from the averments of the bill that the directors of the respondent corporation in June, 1948 adopted a bonus or incentive plan providing for additional compensation to officers and certain other employees based upon a percentage of the corporation's earnings. Complainant questions the reasonableness of the total compensation, that is, salary and bonus, paid to the individual respondents. In the leading case of Rogers v. Hill, 289 U.S. 582, 53 S.Ct. 731, 77 L.Ed. 1385, cited by this Court in Edmonson v. First National Bank of Birmingham, 256 Ala. 449, 55 So.2d 338, the rule was enunciated that where the amount of a bonus payment to officers of a corporation has no reasonable relation to the value of service for which it is given, it is in reality a gift and the majority stockholders have no power to give away corporate property against the protest of a minority stockholder. A long line of Alabama cases recognizes the general rule that where officers of a corporation appropriate assets of the corporation to their own use, equity will intervene on behalf of a minority stockholder who is unable to obtain relief within the corporation. See Decatur Mineral & Land Co. v. Palm, 113 Ala. 531, 21 So. 315; Donald v. Manufacturers' Export Co., 142 Ala. 578, 38 So. 841; Glass v. Stamps, 213 Ala. 95, 104 So. 237; Holcomb v. Forsyth, 216 Ala. 486, 113 So. 516; Gettinger v. Heaney, 220 Ala. 613, 127 So. 195; First Nat. Bank of Birmingham v. Forman, 230 Ala. 185, 160 So. 109. See also Edmonson v. First Nat. Bank of Birmingham, supra. The foregoing cases are illustrative of the principle that the receipt of excessive compensation by the officers of a corporation is manifestly an appropriation of corporate assets by said officers to their own use. See also Textile Mills v. Colpack, 264 Ala. 669, 89 So.2d 187; Bronaugh v. Evans, 204 Ala. 153, 85 So. 556. The question of whether the compensation is so excessive that it bears no reasonable relation to the value of services rendered is a question of fact to be resolved on final hearing. It was observed in Gallin v. National City Bank of New York, 152 Misc. 679, 273 N.Y.S. 87, 114; 155 Misc. 880, 281 N.Y.S. 795, that To come within the rule of reason the compensation must be in proportion to the executive's ability, services and time devoted to the company, difficulties involved, responsibilities assumed, success achieved, amounts under jurisdiction, corporate earnings, profits and prosperity, increase in volume or quality of business or both and all other relevant facts and circumstances; nor should it be unfair to stockholders in unduly diminishing dividends properly payable. See also Decatur Mineral & Land Co. v. Palm, supra; Clamitz v. Thatcher Mfg. Co., 2 Cir., 158 F.2d 687, 692, certiorari denied 331 U.S. 825, 67 S.Ct. 1316, 91 L.Ed. 1841; Winkelman v. General Motors Corp., D.C., 44 F.Supp. 960, 969; 5 Fletcher Cyc. of Corporations, §§ 2133, 2143; 13 Am.Jur. Corporations, §§ 1037, 1039; 27 A.L.R. 300; 40 A.L.R. 1438; 88 A.L.R. 755; 164 A.L.R. 1125. In the case at bar, there are twelve directors of the respondent corporation, four of whom were also officers of the corporation during the period complained of. These four officer-directors are made parties respondent. After careful study and analysis of the leading cases, text writers, and student comment in law reviews, and after reconciling some of the inconsistencies therein, we conclude that the following principles govern cases of this nature: The amount of compensation to be paid to an officer of a corporation is, in the first instance, within the business discretion of the corporation's board of directors and with this discretion the courts are loath to interfere; generally the decision of the directors as to the amount of such compensation is final; where it appears, however, that the directors have not acted in good faith or that the compensation fixed by them is so excessive that it bears no reasonable relation to the services for which it is given, courts of equity have the power to inquire whether and to what extent payment to the officers constitutes misuse and waste of corporate assets; the power to inquire will, therefore, be exercised by the courts upon a clear showing of excessiveness of compensation or bad faith on the part of the directors; but courts are reluctant and will proceed with great caution in exercising the power to prune the payments since it is not intended that a court should be called upon to make a yearly audit and adjust salaries; nor is such an inquiry merely to substitute the court's discretion for the discretion of the directors if that has been honestly and fairly exercised. Rogers v. Hill, supra; Winkelman v. General Motors Corp., supra; Gallin v. National City Bank of New York, supra; McQuillen v. National Cash Register Co., D.C., 27 F.Supp. 639, affirmed 4 Cir., 112 F.2d 877; Heller v. Boylan, Sup., 29 N.Y.S. 2d 653, affirmed 263 App.Div. 815, 32 N.Y. S.2d 131, appeal denied 263 App.Div. 852, 32 N.Y.S.2d 1011; Diamond v. Davis, Sup., 38 N.Y.S. 103; Darmana v. New Orleans Stock Yard, Inc., 226 La. 897, 77 So.2d 528; 5 Fletcher Cyc. of Corporations, §§ 2122, 2133, 2138, 2143; 13 Am.Jur. Corporations, §§ 1027, 1039; 27 A.L.R. 300; Washington, Executive's Living Wage, 54 Harvard L.Rev. 733; Washington, The Corporate Executive and His Profit Sharing Contract, 50 Yale L.J. 35; 38 Cal.L.Rev. 906; see also Alabama cases, supra. We conclude that complainant, a minority stockholder, has sufficiently stated a case for the intervention of equity on behalf of the corporation to inquire as to whether the compensation received by the individual respondents is so excessive that it bears no reasonable relation to the value of the services performed by them. This does not mean, however, that the compensation is per se so excessive; it is a question of fact and the compensation having been regularly fixed by the directors, the burden of proving that it is so excessive is on complainant. Darmana v. New Orleans Stock Yards, Inc., supra; 5 Fletcher Cyc. of Corporations, § 2181; 13 Am.Jur. Corporations, § 1039.