Brief Fact Summary. Plaintiff, Eleanor M. Wilderman, sued her former husband, Joseph Wilderman, a co-owner of the corporation, “Marble Craft.” Plaintiff claims that the defendant paid himself unreasonable and unauthorized compensation from the corporation. Plaintiff seeks to have the excessive money returned to the corporation, declared as net corporate profits, and re-distributed as dividends.
Synopsis of Rule of Law. A director who pays himself a salary bears the burden of proving that the salary is reasonable. A director is not authorized to receive compensation for more than the amount agreed upon by the board of directors. Nonetheless, that value may be reasonable by looking to a number of factors including (1) whether the Internal Revenue Service has allowed the corporation to deduct the amount of payment alleged to be unreasonable, (2) whether the amount bears a reasonable relation to the success of the corporation, (3) the amount previously received as salary, whether increases in salary are geared to the value of services rendered, and (4) the amount of the challenged salary compared to other salaries paid by the employer.
Whether a director bears the burden of proving that compensation is reasonable when he pays that compensation to himself.
Whether a director may pay himself compensation when the board has not reached an agreement on the amount that should be paid.
Whether a director is entitled to a compensation that has not been approved by the board if the compensation reflects services that are reasonably related to the success of the corporation.
Yes. A director must prove his compensation is reasonable when he pays the amount directly to himself.
No. A director is not authorized to pay himself compensation when the board had not agreed to that specific amount because the board is in deadlock.
Yes. The defendant’s work performance alone was vital to the success of the business and he is entitled to a reasonable salary of $45,000. Expert testimony revealed that an executive similarly situated to the defendant would earn a salary of 25,000 to 35,000 a year and the board only approved a salary of not more than $20,800 a year. However, the defendant acquired most of the business for the corporation. He performed most of the necessary estimating and supervising. He alone possessed the skills and expertise to operate the ceramic tile and marble facings business.
Discussion. Directors are required to show that their salary is reasonable when they alone approve the salary for themselves. The board of directors must agree on the amount of compensation paid to an employee. Compensation is not excessive and the court will not declare that the funds be returned to a corporation if the compensation is for services that were crucial to the corporation’s success.