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.
- Not enactedThe President has not signed this bill
- The senate has not voted
- The house has not voted
House Committee on the JudiciaryIntroducedSeptember 26th, 2018
- house Committees
What is it?
In-Depth: Rep. 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 Brands, Sports Authority, Toys 'R' Us, Radio Shack, iHeartMedia, 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 Note: From 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.
- Hearing Before House Committee on the Judiciary Subcommittee on Commercial and Administrative Law
- Institute for Policy Studies Report (Context)
- Smith Business Insight (Context)
- The Wall Street Journal (Context)
- Vox (Context)
- Harvard Law School Forum on Corporate Governance and FInancial Regulation (Context)
Summary by Lorelei Yang
(Photo Credit: iStockphoto.com / ZargonDesign)