Bankrupt companies gave $165 million in bonuses to top execs before going belly up last year

Bankrupt companies gave $165 million in bonuses to top execs before going belly up last year

Chuck E. Cheese, Hertz and J.C. Penney are three very completely different companies however share one factor in frequent: oddly timed govt bonuses before their company chapter filings.

Every firm gave its top executives a pay bonus last year simply before declaring Chapter 11 chapter. So did Neiman Marcus, in addition to oil companies Whiting Petroleum and Chesapeake Power. All instructed, 42 companies awarded hundreds of thousands of {dollars} in so-called “retention” bonuses in the times main up to their bankruptcies, the Authorities Accountability Workplace, or GAO, discovered in a brand new report

“These companies paid bonuses totaling $165 million anywhere from five months to as little as two days before the company filed for bankruptcy,” Michael Clements, the GAO’s monetary markets director, stated in a GAO podcast discussing the report. 

The awarding of retention bonuses by dozens of companies forward of Chapter 11 filings reveals that the U.S. chapter code wants fixing, consultants instructed CBS MoneyWatch. The change maybe entails amending a chapter code rule that Congress handed about 15 years in the past, they stated. 

In 2005, Congress handed the Chapter Abuse Prevention and Shopper Safety Act, which significantly restricted debtor companies’ potential to give out govt and employee retention bonuses and not using a chapter choose’s blessing. The chapter rules, nonetheless, don’t regulate what an organization can do before it recordsdata for chapter, stated George Germain, a chapter skilled and legislation professor at Syracuse College. 

Out of seven,300 companies that filed for chapter last year, none requested for a choose’s approval for retention bonuses, the GAO discovered. As an alternative, many gave the bonuses beforehand. 

Congress can repair this by passing a brand new rule, Germain stated.

“If they want to stop the process of awarding management for driving the company into bankruptcy, they really need to make it before and after bankruptcy,” he stated. “Otherwise, all you’re doing is creating an incentive to pay the compensation before bankruptcy.”

The GAO interviewed chapter attorneys as a part of its 34-page report, which was launched last week. In it, attorneys stated the chapter abuse act is “less-than-effective” as a result of companies have discovered a approach to work round it. Giving retention bonuses general is problematic, they stated, as a result of it successfully reduces the sum of money an organization could possibly be paying towards its debt.

An excuse for monetary stability 

Scrutiny behind retention bonuses comes as U.S. companies are submitting for chapter at a traditionally excessive clip. In 2020, amid the pandemic, 630 companies declared chapter — the very best depend since 2010, in accordance to S&P World. Companies are nonetheless submitting for chapter this year, however the information midway by 2021 suggests the degrees will not be as excessive as last year. 

Plummeting gross sales in 2020, attributable to the coronavirus pandemic, led a few of the nation’s largest retailers to file for chapter. However as shops closed and workers have been furloughed or laid off, some CEOs acquired hefty bonuses

Hertz CEO Paul Stone acquired $700,000, Chuck E. Cheese CEO David McKillips acquired $1.3 million and J.C. Penney CEO Jill Soltau acquired $4.5 million — simply to title just a few.  

“Not necessary at all”

Companies grant these retention bonuses as a result of they need the absolute best govt accessible to handle the chapter turnaround, stated Jared Ellias, a company chapter legislation skilled and professor on the College of California at Hastings. In some situations, companies are frightened of dropping top managers as a result of “it could take six months to a year to hire someone new,” Ellias stated.

In regulatory filings, companies usually argue that retention bonuses entice executives and different key workers to keep and restore what’s ailing the agency.

“That’s an excuse,” Germain stated. “They’ll say [the CEO] knows where the problems are and how to fix them, but whether that’s true or not, nobody knows. In most cases, [the bonus] is not necessary at all. To some degree, the executives are taking advantage of a company with already serious problems.” 

Chuck E. Cheese defended the bonuses it gave McKillips and 29 different workers, saying in a press release to CBS MoneyWatch that the corporate “took action to preserve business continuity.”

“These actions were put in place to ensure we have the management expertise and dedication to best position the company, in this unprecedented environment, to meet the needs of our customers, employees and business partners,” the corporate stated. 

Hertz didn’t reply to requests for remark. 

J.C. Penney declined to remark however the firm said in a regulatory submitting last year that the bonus pay was designed to “retain and continue to motivate its named executive officers and other employees through the volatile and uncertain environment affecting the retail industry.” 

Khristopher J. Brooks



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