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On eve of bankruptcy, U.S. firms shower execs with bonuses
Not that I'm terribly left of center or anything, but this aligns with the reasons why I thought following the 2008 bailout the US Taxpayers should get a rent / mortgage holiday, at the banks expense.
Nothing new. In the 80" CEO made about 30 times their average employee. In the last several years about 300 times. Board of directors consist of other CEOs. They take care of each other. A bad CEO gets their pay for the whole contract even if they get fired in the middle. The story of Nardelli (link) is a text book. One of the most hated CEOs that cut cost at Home Depot and eventually deteriorate it while earning huge compensation and finally got fired. Then Chrysler nominated him as a CEO and file for a bankruptcy couple of years later.
I've been curious about this. Independent of the 2005 change in the bankruptcy law (which qualifies as something new since the 80s), the bankruptcy code has a clawback provision. This allows the bankruptcy trustee to go after payments the company makes outside of its ordinary course of business. Like retention bonuses.
A company in distress typically justifies its Key Employee Retention Plan (KERP) as necessary to hold onto employees essential to keeping the business going. Without this bonus the employee would leave for greener pastures. Much greener in fact, because usually when a company is floundering, it's only that one company where long term survival and employment prospects are iffy.
But this time, there aren't other greener pastures. As stated in the article: "Some specialists argue the bonuses are hard to justify for executives who may have few better job options in an economic crisis."
This page from an executive compensation advisor firm observes:
[T]here is a risk that these payments may be subject to clawback under Section 548 of the Bankruptcy Code as fraudulent transfers.
Similarly, adjusting pay packages of key employees prior to a bankruptcy filing can, with the wrong facts, lead to creditor mistrust and bad press. For example, in 2011, Hostess Brands raised the salary of its CEO from $750,000 to $2,550,000 (approximately 300%) and gave large raises to nine other key executives six months prior to filing its bankruptcy petition. When creditors discovered these facts, they raised formal objections in court filings and alerted the press. Hostess claimed the executive’s salaries were increased at a routine compensation review long before it decided to file for bankruptcy, but ultimately the company retracted the salary increases.
Comments
The story of Nardelli (link) is a text book. One of the most hated CEOs that cut cost at Home Depot and eventually deteriorate it while earning huge compensation and finally got fired. Then Chrysler nominated him as a CEO and file for a bankruptcy couple of years later.
A company in distress typically justifies its Key Employee Retention Plan (KERP) as necessary to hold onto employees essential to keeping the business going. Without this bonus the employee would leave for greener pastures. Much greener in fact, because usually when a company is floundering, it's only that one company where long term survival and employment prospects are iffy.
But this time, there aren't other greener pastures. As stated in the article: "Some specialists argue the bonuses are hard to justify for executives who may have few better job options in an economic crisis."
This page from an executive compensation advisor firm observes: https://www.pearlmeyer.com/knowledge-share/article/executive-compensation-in-bankruptcy-motivating-key-employees-through-corporate-financial-distress