ESOP Case Gives Warning on Excessive Executive Pay

A district court has ordered the former president and chairman of Delta Star, Inc. to repay $3,300,000 to the company's ESOP. In Delta Star, Inc. v. Patton (U.S. District Court for the Western District of PA, 6/10/99), the current ESOP trustee of Delta Star, whose ESOP owns over 98% of the company's stock, brought suit against the former president and chair of the company, charging that the defendant used his position as ESOP trustee to pay himself excess compensation. The court found that the company's earnings were flat during this period primarily because of his pay.

The decision was based both on ERISA and Delaware corporate law. Under ERISA, as outlined in a Department of Labor memo on this topic, ESOP trustees do have the responsibility to act to protect shareholder interests by considering such issues as executive compensation. While the facts here are extreme, the case highlights the importance of not allowing senior management to set its own compensation in an ESOP company. Board compensation committees or, at the least, a compensation advisor, should be use to set salaries or establish objective guidelines.