Before the bankruptcies came the bonuses: $10 million at
That’s how much was promised to executives only weeks or in some cases days before bankruptcy, according to a Bloomberg analysis of regulatory filings. Of the 100 or so major companies that have filed since the
The companies say they need to keep their management teams to help turnaround consultants repair the damage, even when it means rewarding people who were in charge when the business began sinking. The timing of some of the bonuses, before the filing, legally heads off opposition from creditors, who can’t block such payouts unless they’re made after a case reaches court.
The practice isn’t new, but the context is unprecedented. The economy is in a tailspin, and while thousands more Americans stand to lose their jobs in J.C. Penney’s bankruptcy, the
“We really find them offensive in light of the median worker pay, the reductions in benefits and layoffs due to store closings,” said Julie Farb, director of the Center for Strategic Research at AFL-CIO, a federation of 55 labor unions. “It’s all made worse in the current Covid environment.” J.C. Penney declined to comment.
According to the law, company creditors and the U.S. Trustee, which oversees bankruptcies for the
To challenge pre-bankruptcy bonuses, creditors need to file an adversary claim, such as a fraudulent-transfer claim, which can be costly and time-consuming.
In recent weeks, the U.S. Trustee has objected to about a dozen bonuses it says were excessive, said Peter Carr, a spokesperson for the agency. The Trustee has generally been unsuccessful in blocking payouts, he said.
“The only remedy is a claw-back,” Carr said. “The U.S. Trustee program can’t seek that remedy, so we object to any debtor motions that would prevent the unsecured creditors’ committee from pursuing this remedy.”
On May 19, Hertz, the rental-car company devastated by the pandemic-related clampdown on travel,
Chesapeake also didn’t wait to file to before it made retention payouts to management, including CEO
Briggs & Stratton
“Board members want the people that know the business, know the assets of the company, know the nuances and facets of the business, and can leverage that understanding and knowledge to extract value going forward,” said Ian Keas, a principal at Pearl Meyer, an executive-compensation consulting firm.
Supporters say boards need to determine what value the executives can bring to the bankruptcy process and not necessarily what they’ve done in the past.
Opponents of the bonuses, however, don’t object only to the timing. They point to the vast number of unemployed Americans, stagnant wages for those still on the job and the dire health risks for many low-paid front-line workers. They say the bonuses look bad with the economy in a tailspin and not only cut into what creditors may be able to salvage, they’re also unfair to employees who can be victims of poor executive decisions.
Another objection: rewarding executives who led companies down the path to bankruptcy, said Nell Minow, vice chair of ValueEdge Advisors, a shareholder-advisory firm.
“They’re going to say they’re doing it for stability and consistency,” Minow said. “But when a company is heading toward bankruptcy, maybe stability and consistency should not be your priorities. Maybe it should be rethinking the company’s strategy.”
--With assistance from
To contact the editors responsible for this story:
© 2020 Bloomberg L.P. All rights reserved. Used with permission.