Bonuses before bankruptcy filings
The coronavirus recession is pushing many companies into bankruptcy, a painful process that has led to layoffs, wiped out some investors and hurt the economy.
But the CEOs of some of these businesses are doing just fine.
Companies that are struggling to pay creditors and suppliers are managing to find millions of dollars to pay bonuses to their bosses. The payments, which are made just before a bankruptcy filing, appear to be legal and have been made by several companies.
J.C. Penney, which is closing 154 stores, paid its CEO, Jill Soltau, $4.5 million. The CEO of Whiting Petroleum, which sought bankruptcy protection in April, received $6.4 million, and Chesapeake Energy paid bonuses ahead of its bankruptcy filing. Executives at Hertz also got payments before the rentalcar giant sought bankruptcy protection.
Companies have said that the payments are meant to help them retain qualified executives through the recession and bankruptcy.
But critics counter that the money would be better spent on rankandfile employees. “It makes me angry because they are not taking care of the people who are actually making the money,” said Liz Marin, who worked at Toys R Us when it filed for bankruptcy and is now an organizer in training at United for Respect, a nonprofit organization that seeks to help retail workers. Toys R Us paid bonuses to executives before its bankruptcy.
Executives who lead companies into bankruptcy are at risk of losing their jobs. Geisha Williams left PG&E Corp. in January 2019, just before its utility filed for bankruptcy protection, for example.
But other corporate boards, which hire the CEO and set compensation for senior officers, seem to be showing more grace toward the boss. In many cases, the executives could do little to prevent the crushing decline in business when the pandemic and lockdowns stopped people going into stores, eating out and taking trips. The drop in the oil price earlier this year was unusually large, walloping many energy companies, though some, like Chesapeake, were already burdened with large debts.
Certain outlays that a company makes just before bankruptcy — for instance, payments to suppliers — are at risk of being clawed back. But the bonus payments typically don’t fall into that category, legal scholars say.
Typically, a company in Bankruptcy Court has to get a judge’s approval before doing just about anything of importance, especially spending millions of dollars. If a CEO gets a new compensation package during bankruptcy, a judge would have to decide whether the compensation is justified after hearing from creditors, shareholders and other groups. But this can be a long and expensive process — a big reason companies pay bonuses before bankruptcy.
In normal times, a large portion of executive compensation is paid out in stockbased awards that top officers earn over time. But the stock of a bankrupt company is most likely going to be worth little once a company resolves its bankruptcy or, in extreme cases, sells its assets and goes out of business.
As a result, boards have quickly changed how top officers get paid, giving them cash bonuses instead of stockbased awards. But paying cash can be a windfall for CEOs at a time when the livelihood of employees are under threat.
“The companies are creating certainty for their CEOs at a time of the greatest uncertainty for the employee base and the company in general,” said Brett Miller, head of data solutions for the responsibleinvestment arm of Institutional Shareholder Services, which advises investors on corporate governance issues.
Some companies point out that their cash bonuses are smaller than the incentivelinked compensation previously awarded to executives. Chesapeake said in a filing that CEO Robert Lawler was eligible for a cash bonus 34% smaller than the $13.5 million at which his 2019 variable compensation was valued. Soltau of J.C. Penney got a $4.5 million cash bonus before the retailer declared bankruptcy, much lower than the $8.2 million initial value of her 2019 incentivebased awards.
But some stock awards had slumped in value, as share prices of troubled companies plummeted even before the pandemic took hold. The cash bonuses may have enabled the executives to recover pay that they had most likely already lost, possibly for good.
Some companies don’t even try to argue that executive pay was cut. At $6.4 million, the cash bonus paid to Whiting Petroleum CEO Bradley Holly is larger than the $5.5 million at which the company valued his total compensation for 2019.
And of course the bonuses are far higher than what regular employees earn. Soltau’s was many times the $11,482 that the retailer’s median employee, a parttime worker, earned during J.C. Penney’s 2019 fiscal year, according to a securities filing.
The cash bonuses have also led to the concealing, loosening and removal of the tools companies normally use to tie pay to performance, which many critics contend were already too weak. Companies still operate when seeking protection under Chapter 11 of the bankruptcy code. And, in theory, boards could require CEOs to hit sales targets or achieve other goals.
And in some cases, a few strings remain. Soltau has to repay a fifth of her cash bonus if she fails to achieve certain performance goals, and Lawler has to repay half of his. But J.C. Penney and Chesapeake did not disclose the goals in their securities filings and declined to answer questions about them.
Congress passed a law in 2005 aimed at curbing retention bonuses paid during bankruptcy. Under the law, companies are allowed to pay incentivebased bonuses, but the legal cost of constructing such payments and getting them approved in Bankruptcy Court soared after 2005, according to research by Jared Ellias, a professor at the UC Hastings College of the Law.
Congress could change bankruptcy law so that compensation payments made before the filing could be clawed back, Ellias said. In addition, lawmakers could make it easier for creditors to pursue claims against executives after the bankruptcy. “This doesn’t feel right,” he said of the recent large bonuses, “and it doesn’t instill public confidence in the bankruptcy system.”