Arbitration Clauses in CEO Employment Contracts: An Empirical and Theoretical Analysis

By Thomas, Randall; O'Hara, Erin et al. | Vanderbilt Law Review, May 2010 | Go to article overview

Arbitration Clauses in CEO Employment Contracts: An Empirical and Theoretical Analysis


Thomas, Randall, O'Hara, Erin, Martin, Kenneth, Vanderbilt Law Review


A bill currently pending in Congress would render unenforceable mandatory arbitration clauses in all employment contracts. Some perceive these provisions as employer efforts to deprive employees of important legal rights. Company CEOs are firm employees, and, unlike most other firm employees, they can actually negotiate their employment contracts, very often with attorney assistance. Moreover, many CEO employment contracts are publicly available, so they can be examined empirically. In this paper, we ask whether CEOs bargain to include binding arbitration provisions in their employment contracts. After exploring the theoretical arguments for and against including such provisions in these agreements, we use a large sample of CEO employment contracts to test the several different hypotheses for including such provisions. We find that only about one half of CEO employment contracts in our sample include such provisions. What factors might determine whether CEOs agree to arbitrate their employment disputes with their companies? We find that CEOs that receive a higher percentage of long-term incentive pay as a fraction of their total pay, that work in industry sectors that are undergoing greater amounts of change, and that have lower long-term profitability are statistically significantly more likely to have arbitration provisions in their employment contracts. The importance of contextual factors for arbitration clauses in CEO contracts indicates that regulation of arbitration clauses in employment contracts should be more nuanced than that found in pending legislation.

INTRODUCTION

Both executive compensation1 and the use of arbitration provisions in employment contracts2 are hot topics in legal scholarship today. The executive compensation debate revolves around the fight between shareholders and CEOs over how to divide up the firm's profits. Critics of the current regime argue that American CEOs are overpaid because they can dictate the terms of their employment to boards of directors,3 while defenders of the system see only a few bad apples in the barrel.4

In the employment setting, another argument rages over the relative power of employees versus employers to select the forum where they decide their disputes.5 This issue is currently one of the major concerns in the area of arbitration, where scholars have debated whether employment agreements are contracts of adhesion that include arbitration provisions in order to take away important substantive and procedural rights from employees.6

As employees, CEOs actively negotiate their employment contracts, often with the assistance of attorneys. The CEO of the corporation therefore is an important player in both of these disputes: on the one hand, she has an important interest as an employee in how she and the company resolve any potential arguments; on the other hand, wearing her hat as the CEO, she bargains with the board of directors of her firm to try to get what she wants in her own employment arrangements. CEO employment contract provisions thus shed light not only on disputes between employees and employers, but also on the relationship between boards of directors and corporate executives.

In this Article, we seek to explore both relationships by focusing on the presence of arbitration provisions in employment contracts. Critics of such provisions claim that companies prefer arbitration and therefore use contracts of adhesion to force employees to give up their rights to litigate job-related disputes. The strong version of the contracts-of-adhesion theory predicts that arbitration provisions will appear in all employment contracts because arbitration is always a better forum for the company. A weaker claim is that while arbitration is preferable in some circumstances, and litigation in others, many employees lack the bargaining power to seek the right to litigate when it is the optimal choice. The arbitration provisions of CEO employment contracts enable us to look at cases in which employees with bargaining power negotiate meaningfully over where to resolve their disputes. …

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