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bill Progress


  • Not enacted
    The President has not signed this bill
  • The senate has not voted
  • The house has not voted
      house Committees
      House Committee on the Judiciary
    IntroducedSeptember 26th, 2018

What is it?

This bill — the No Bonuses in Bankruptcy Act of 2018 — would prohibit companies in Chapter 11 bankruptcy proceedings from paying out bonuses to highly-compensated employees and insiders of the debtor. “Highly compensated” employees would be defined as persons employed at annual rates of compensation exceeding $250,000.

Impact

Companies in Chapter 11 proceedings; Corporate executives; and corporate creditors.

Cost

A CBO cost estimate is unavailable.

More Information

In-DepthRep. John Duncan (R-TN) introduced this bill to prevent companies in Chapter 11 bankruptcy from paying bonuses to highly compensated employees, such as executives, and insiders.

In recent years, corporations have come under fire for paying bonuses out to executives while going through Chapter 11 bankruptcy. Hostess BrandsSports AuthorityToys 'R' UsRadio ShackiHeartMedia, and Borders are among the companies that have been criticized for paying their executives sizable bonuses even as their employees lose their jobs. Writing about Toys ‘R’ Us CEO David Brandon’s $2.8 million retention bonus just before his company’s Chapter 11 filing, Axios’ Dan Primack commented on the inequality between Brandon’s bonus and those of the company’s employees:

“Brandon could receive nearly $15 million that is related to a bankruptcy that it was his job to prevent from happening in the first place. Other senior execs could get over $1 million a piece. The other 3,805 employees get to share from what would be a $60 million pot, per court approval, which works out to less than $16,000 per head. Guess which group will be manning cash registers at 5pm on Thanksgiving Day, and which will be home with their families?”

Defending its executive bonuses during Chapter 11 proceedings, Hostess argued that its “prime goal now is to maximize the value of the company as it goes through liquidation,” and argued that executives’ bonuses, which were linked to their achievement of certain benchmarks for rapid disposal of the company’s assets, were needed to incentivize speedy, effective work. The company argued that the rapid disposal of Hostess’ assets was “ultimately to the benefit of all the people and the organizations to whom Hostess owes money,” including employees.

Richard Levin, a partner at the law firm Cravath, Swaine, and Moore, adds that companies in bankruptcy "need to attract the best people and compensate them for the tough work they have to perform," and finding a replacement can be expensive. For executives, the work is especially tough, as they work two difficult jobs: running the troubled business and attending to all the legal and procedural headaches associated with Chapter 11 court proceedings.

Some research also suggests that key employee retention plan (KERP) bonuses paid out to senior employees of companies in bankruptcy restructuring improve companies’ outcomes coming out of bankruptcy. In a study of 417 public companies that filed for bankruptcy from 1996-2007, Queens School of Business professor Wei Wang and Hong Kong University of Science and Technology’s Vidhan Goyal found that firms with KERPs in place moved through restructuring faster and were more likely to be successful after emerging from Chapter 11. Additionally, they found that 78% of incentive bonuses were paid out contingent on bankruptcy resolution, and almost half allowed for bonuses contingent upon the firm’s emergence from Chapter 11 — in other words, they were closely tied to performance. Finally, they found that the total cost of these plans was quite low in the grand scheme of things. Wang pointed out:

“One thing I found surprising was that the total cost devoted to these plans in the 417 companies studied was less than 1 percent of the firms’ pre-bankruptcy petition assets. So why are people so skeptical about these plans? If you think of legal fees, lawyers account for eight to 10 percent of assets, but people don’t argue about legal fees.”

However, in past Chapter 11 cases, the Justice Department’s US Trustee Program, a watchdog agency meant to protect the bankruptcy system’s integrity, has argued that many “incentive programs” like Hostess’ function as “disguised retention program[s],” which are “prohibited in bankruptcy cases absent extremely specific and unusual circumstances.”


Of NoteFrom 1993 to 2012, 38% of the top 500 most highly-paid CEOs headed poorly performing companies — and 22% of the top 500 CEOs’ firms either ceased to exist or received taxpayer bailouts after the 2008 financial crash.

There is a 2005 measure, fueled by popular outrage over money paid to Enron executives after that company’s implosion, that restricts “retention” bonuses that reward executives for sticking with distressed companies. However, it’s rarely enforced, and companies usually manage to justify executive pay.


Media:

Summary by Lorelei Yang

(Photo Credit: iStockphoto.com / ZargonDesign)

AKA

No Bonuses in Bankruptcy Act of 2018

Official Title

To amend title 11 of the United States Code to prohibit the payment of bonuses to highly compensated employees and insiders of the debtor to perform services during the bankruptcy case; and for other purposes.

    If your company is failing you shouldn’t be rewarded, it’s that simple.
    Like (253)
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    Not all bankruptcies are the same. Let the bankruptcy court decide how to restructure the business and how bonuses, salaries, or clawbacks are configured.
    Like (40)
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    If a business fails, it’s usually due to poor management by the upper management staff. Why should they receive bonuses when they’re clearly not doing their job?
    Like (149)
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    We must enforce accountability for fiscally irresponsible behavior. I support this measure.
    Like (106)
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    Failure has consequences.
    Like (56)
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    I think this is a no brained. There are employees and shareholders that have a claim to that money before the people who caused the issues... of executives take bonuses and file for bankruptcy then that is stealing
    Like (44)
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    Seriously? You even have to ask this question? Gee, 'I'm gonna run company x into the ground but it's all good, I still get me 6 figure bonus while the employees scramble to pay their bills'. Does that sound about right? If you're fine with this, YOU are the problem.
    Like (42)
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    If they are Bankrupt where the money coming from to pay Executives!!!! The little people who work for them deserve the bonus for staying
    Like (37)
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    Poor management shouldn’t be rewarded.
    Like (34)
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    DEFINITELY, fILING Bankruptcies = NO BONUSES and NO PAY and or BENEFIT INCREASES or EXTENTiONS and NO LUMP SUM ONE TIME PAYOUTS!!!!! IF LOAwEST PAID WORKERS LOSE BENEFITS so do Executives!!!
    Like (33)
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    Yes! For example, if a property corporation built a casino in Atlantic City NJ, then filed bankruptcy, therefore, didn’t pay the multitude of trades who constructed the casino. The bankruptcy caused some of trade companies to go out of business. However, because the property corporation used loopholes in the bankruptcy laws, the property corporation continued to buy properties, continued to build and continued to file bankruptcy using the loopholes to renege on paying the trades. Yet, the property corporation continued to ‘reward’ their executives with bonuses at the end of their fiscal year. Sound familiar? The practice of paying executives a bonus when the company itself files bankruptcy is completely unfair, wrong and should be illegal.
    Like (27)
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    Those responsible for the mismanagement that led to bankruptcy, should not profit from their erroneous ways.
    Like (17)
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    Absolutely, they should be prohibited. This really is a no-brainer. If they don’t have money to pay salaries or repay creditors, then they have no business paying bonuses to executives. Furthermore, if execs drove the company to bankruptcy...THEY DON’T DESERVE A BONUS!
    Like (14)
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    It doesn't seem right to be compensated to keep creditors from being paid. However, the government's job doesn't involve the inner workings of business; unless illegal actions are taking place.
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    Just what would they be paying them bonuses for? Getting them to bankruptcy? Oh for crying out loud, these companies have obligations to their suppliers and lenders. They had an obligation to their shareholders to stay the heck out of bankruptcy. No this isn’t the time to hand out bonuses and run up credit cards. It’s the time to be fiscally responsible for a change and be accountable for past mistakes. Draw up a recovery plan. Nows the time to give back your bonuses and stock options, not get more.
    Like (13)
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    This is so obvious it is painful 😖.
    Like (13)
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    The highest ups in a company should be paid solely based off how the company is doing. I don't believe they should ever receive a salary or any kind of bonus
    Like (12)
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    Shareholders and employees are the big losers when a company files bankruptcy. Upper management should share in the loss as well.
    Like (12)
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    Why should executives get bonuses when companies fail? Bonuses should be for a business that is successful.
    Like (9)
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    👍, companies should be prohibited from paying bonuses at all while in Chapter 11 bankruptcy protection.
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