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

42 Pages Posted: 24 Aug 2008 Last revised: 24 Aug 2017

Randall S. Thomas

Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)

Erin A. O'Hara O'Connor

Florida State University - College of Law; Gruter Institute for Law and Behavioral Research

Kenneth J. Martin

New Mexico State University - Department of Finance & Business Law

Date Written: August 22, 2008

Abstract

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.

Keywords: CEO, arbitration, employment contracts

JEL Classification: G30, J33, K22

Suggested Citation

Thomas, Randall S. and O'Hara O'Connor, Erin A. and Martin, Kenneth J., Arbitration Clauses in CEO Employment Contracts: An Empirical and Theoretical Analysis (August 22, 2008). 63 Vanderbilt Law Review 959 (2010); Vanderbilt Law and Economics Research Paper No. 08-23. Available at SSRN: https://ssrn.com/abstract=1247843

Randall S. Thomas (Contact Author)

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Erin A. O'Hara O'Connor

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

HOME PAGE: http://www.law.fsu.edu/our-faculty/deans/ohara-oconnor

Gruter Institute for Law and Behavioral Research

158 Goya Road
Portola Valley, CA 94028
United States

Kenneth J. Martin

New Mexico State University - Department of Finance & Business Law ( email )

College of Business Administration & Economics
Las Cruces, NM 88003
United States
505-646-3201 (Phone)
505-646-2820 (Fax)

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