Chesapeake files for Chapter 11
Before the bankruptcies came the bonuses: US$10 million at J.C. Penney Co., US$25 million at Chesapeake Energy Corp., US$1.5 million at Hertz Global Holdings Inc.
That’s how much was promised to executives only weeks or in some cases days before bankruptcy. Of the 100 or so major companies that have filed since the coronavirus shutdown began, 19 of them have committed to paying a total of US$131 million in retention and performance bonuses, both before and after filing, a number that’s poised to climb as a record number of Americans are jobless and the pandemic spreads.
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 US$4.5 million going to Chief Executive Officer Jill Soltau, who in fairness took over in 2018, when the company was already decades in decline, is pretty much a done deal, as are other payouts.
“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.”
According to the law, company creditors and the U.S. Trustee, which oversees bankruptcies for the Justice Department, can dispute bonuses paid to executives while in bankruptcy, but not payments made before filing.
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, handed out US$1.5 million to three top executives as part of US$16.2 million in retention bonuses. Three days later, it filed for bankruptcy. The company said in April that it had cut 10,000 jobs in North America. Hertz didn’t respond to requests for comment.
Read more: COVID-19 Is Bankrupting American Companies at a Relentless Pace
Frontier Communications Corp., the telecom hurt by customers’ rejection of land lines, approved bonuses in February and filed in April. Frontier declined to comment.
Chesapeake also didn’t wait to file to before it made retention payouts to management, including CEO Doug Lawler, who’s been leading the shale driller since 2013. Chesapeake said in May that it intended to pay US$25 million in bonuses to 21 executives while also requiring some of them to take salary cuts. The company sought bankruptcy protection in late June. Chesapeake declined to comment.
Small-engine manufacturer Briggs & Stratton Corp. and Ascena Retail Group Inc., owner of women’s-wear chains Ann Taylor and Lane Bryant, weren’t in bankruptcy when they made sure to secure the services of their management teams.
Briggs & Stratton skipped an interest payment last month while promising payouts to its CEO and chief financial officer. Ascena was negotiating a bankruptcy filing at the same time its executives received US$2.7 million. Briggs & Stratton declined to comment. Ascena didn’t respond to requests for comment.
“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.
Stephen Spengler has been CEO of bankrupt satellite company Intelsat SA since 2015. He’s in line to get a US$6.9 million bonus despite the Justice Department’s opposition to the incentive plan. Intelsat declined to comment.
“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.”