What difference does an executive being paid $1 a year versus $0 a year give?
I’m thinking about tax, retirement, shares/options and health insurance rather than being able to showoff to other executives getting paid tons.
In order for a contract to be valid, there has to be consideration, meaning something that is exchanged for some other thing. In this case, the $1 is the consideration for the executive’s services as an employee. Without the $1, there would be no valid employment contract, which leads to all sorts of legal consequences regarding the executive’s relationship with the company.
Would the dollar-a-year salary violate minimum wage laws? Or is it different if this is for a salaried position?
It’s probably due to contract law. A contract isn’t valid unless there’s consideration given to both parties, which is to say, both parties gain from it. So you can’t have a contract that Mr. Bigshot will work as the CEO of Megacorp for $0 per year, since that wouldn’t have any consideration for Mr. Bigshot, but you could have a valid contract that says he works as the CEO for $1 per year: Mr. Bigshot gets his dollar, and Megacorp gets his services, so both sides have consideration.
Isn’t that the same reason why property is sometimes “sold” to charities, non-profits, etc for $1?
I’m pretty sure that’s not really true, though. Presumably CEOs have health insurance and other benefits, which are certainly worth more than a dollar.
Of course, but that has absolutely jack-all to do with the question asked, or for the matter the specific salary,
In a way, though, it does answer the question.
$450 a week is required as a salary by federal law for an employee to be exempt from overtime laws provided that all other requirements are met, and a CEO would certainly meet them. So that’s only $1800/month. A nice insurance policy (paid by the employee through payroll deductions) could eat that up pretty quickly, and you could make another $16,500 in elective deferrals to a 401k, reducing take-home pay to $1.
So all you have to do is write the contract this way:
Salary: $1/year
Health Benefits: $1800/month
Expense Account: $20,000/month
Stock Options: $1 million/month
And there you are with a $1 salary. It doesn’t mean that $1 goes on the CEO’s W-2 at the end of the year or that only $1 is considered income by the government.
ETA: To address the OP: The “advantage” is that the CEO gets most of their pay through stock options. Thus, shareholders are assured that the CEO has the highest level of motivation possible to cough lie, cheat, steal and misstate earnings cough increase shareholder value.
It seems relevant: would health insurance for example count as consideration? If so, would the $1 salary really be necessary to satisfy contract law?
Well, you could either 1) take the risk of later heading to court to establish whether or not the side benefits such as health insurance would satisfy contract law, or 2) pay the person $1 a year which has already been established as satisfying contract law.
Many, many years ago when I wanted out of a business partnership that was failing and was willing to give my partner my share of the business and just walk away, his wife (who was very smart and a lawyer) insisted that he pay me $1 for my share of the business ownership for just this reason. Nice, clean, and well documented.
You’re acting like consideration is either new or at the very least some poorly defined concept that we don’t understand when the opposite is true. In reality, health and other benefits worth tens of thousands and stock options worth tens of millions are much stronger consideration than a nominal $1 amount which has at times been found to be insufficient legal detriment.
Right, but the question (as I read it) is: What is the difference between what you wrote above and:
If that difference is literally nothing more than one dollar, why do they even bother with the dollar?
It seems from other posts that the answer is that the $1,021,800 per month in benefits that this guys gets might count as consideration under contract law - but it might not. One dollar in salary is regarded as cheap way to insure that nobody will have to pay lawyers (a lot more than a dollar!) to find out.
On preview, though, it appears Fuzzy Dunlop believes that it is well settled that it does count as consideration. If that is the case, the dollar in salary is not necessary under contract law - meaning the original question is still unanswered: Why do they pay it?
All that’s necessary for consideration is to agree to do something that one was otherwise not required to do or to agree to abstain from doing something one otherwise could freely have done. It clearly doesn’t have to be monetary - there needs to be consideration for all parties and the only thing the executive is agreeing to do is to provide his or her talents as a manager and leadership for the company. In other words, show up to work every day.
Or think about it another way - If you have a contract with a health insurer, and you agree to pay them $500 a month in premiums and they agree to insure your health. Do they also pay you $1 because otherwise there’d be no consideration on their part? Of course not! Health insurance is a totally legitimate form of consideration for a contract.
Not to mention the millions in restricted stock or options they also earn as payment.
Thanks - that all makes sense. I didn’t mean to imply that I disagreed with you - this isn’t my field, and I know little about it.
It re-opens the original question, I think, after many posts seemed to conclude that the $1 was necessary for a valid contract.
I didn`t think you disagreed with me. In fact, all along I’ve been trying to support your original point - that the other valuable consideration execs receive invalidates ‘consideration’ as the reason for the $1 per year salary. It’s not my field either. I hope someone besides us comes along with some new info soon.
Yes, and the issue with health insurance and so forth is that leal consideration has precisely nothing to do with whatever federal law calls it for other matters (like overtime). The two have no relationship whatsoever.
Health insurance can’t neccessarily be easily costed to a specific individual. Expense accoutns may be considered as much a neccessary reimbursement as any kind of “pay”. I don’t know about stock options, but I could very easily see a court being leery of calling a possible payout of indefinite amount at some future point “consideration.” That could all have significant legal issues with being the sole method of remuneration.
This is insane.
First of all, yes health insurance can be costed easily to a specific individual. When you enroll a new employee in the plan the insurer starts billing for them. When they leave you terminate coverage and they stop billing.
Second, it doesn’t matter. As you said, it has precisely nothing whatever to do with “pay”. The consideration is the coverage. By your logic ALL insurance policy contracts would be void. Think about it - could you cancel a 1 year insurance contract you took out as an individual under the logic that the insurer wasn’t proffering any consideration? Everyone would say “uhh… what about covering you in the event of any medical costs?”
Third, you may be able to easily see a judge voiding a contract because the value is imprecise and volatile but you’re dead wrong. In fact, if that were the case it’s hard to imagine any contract being valid. Party A agrees to work for Part B and Party B grants options to buy stock which are 1) of non-zero value to Party A and 2) of non-zero value to the IRS and 3) of non-zero value to Party B and 4) of non-zero value to anyone who may be able to buy them.
I don`t get this crazed clinging to consideration when it’s so clearly not the reason. Executives receive restricted stock or stock options worth hundreds of millions of dollars. How could that possibly not be legal consideration?
I’m pretty sure the correct answer is that it’s a gimmick.
“crazed clinging”? “clearly not the reason”?
I will gently suggest that…
a) Everyone seems to agree that $1 in annual compensation (as opposed to $0 in compensation) seems to happen fairly frequently. If it never happened, there wouldn’t have been an OP. As an example, I believe that Steve Jobs took that much in salary from Apple in 2008 (and perhaps 2009).
b) Several of us have mentioned that $1 in compensation is an inexpensive way of ensuring that the “consideration” aspect of contract law is satisfied. I even gave an example from my personal life where my partner’s attorney/wife insisted on my accepting $1’s worth of compensation to avoid potential legal issues.
c) You have mentioned that this is not your field, and have not suggested another reason for that $1 compensation. Instead, you’ve come up with other items that you have analyzed to be “consideration” and assumed that this has settled the matter. (Note that your argument may well be spot on in economic terms and completely irrelevant in legal terms.)
d) The businesses and executives that seem to have zeroed in on that $1 in annual compensation are not doing so to keep the members of this fine forum (and particularly you and me) happy. They are doing it for a reason, and legal consideration is an excellent reason.
It’s been pointed out to me in the past that a good lawyer can prevent you from taking a loss in the courts - but a really good lawyer keeps you out of court in the first place. All for a measly dollar.
GreasyJack, if it was all a gimmick, then $0 in compensation would have been a better gimmick.
It may not be my field, but it isn’t any of the other posters’ fields either and I learned enough about consideration in undergrad contract law to realize it’s obviously not the reason. I’m hoping an actual lawyer will join in and confirm that it’s obviously not the reason and maybe even suggest what the real one is.