Business Associations, Pages 541–544

Wilderman v. Wilderman

Court of Chancery of Delaware, 1974

Facts:

Plaintiff and defendant started a tiling corporation. Defendant did most of the work and was paid more, but they had equal shares of stock. The parties then divorced and plaintiff began complaining about how defendant was paying himself too much. The IRS had previously reduced the deduction allowed on his salary in three years, making the excess de facto dividends.

Plaintiff only allowed his salary to go up to $20,800, but defendant paid himself $92,538.71 in 1971, $35,000 in 1972, and $86,893.40 in 1973. Plaintiff was only paid $7,800 for the work she did for the company. Expert testimony said that reasonable compensation for defendant would have been $25,000–$35,000. The IRS limited his deduction in 1971 to $52,000.

Issue:

Did defendant excessively compensate himself?

Rules:

  • LexisNexis IconWestLaw LogoGoogle Scholar LogoPage 543

    [W]here, . . . the recipient's vote as a director was necessary to the fixing of the amount of his compensation, then the burden of showing the reasonableness of such compensation clearly falls upon its recipient

  • Page 543Several factors are considered when deciding if compensation is excessive:

    • What similarly situated executive received
    • The ability of the executive
    • What the IRS has allowed the corporation to deduction
    • The relationship between the salary and the success of the company
    • The amount previously received as salary
    • The relationship between the salary and services rendered
    • The amount of the salary compared to other salaries paid by the corporation

Reasoning:

Defendant has no provided evidence as to what other local tile executives earn, and his services may not be as essential as he says they are. And while his salary more than tripled between 1966 and 1971, the company's earnings only rose from ~$380,000 to ~$680,000.

Holding:

Yes, defendant excessively compensated himself, although he should be compensated more than plaintiff contends. He is entitled to $45,000 for 1971 and 1973, and the $35,000 he paid himself in 1972. Defendant must return $89,431.40 to the corporate treasury with interest, as well as the corresponding payments to the pension fund.

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